<PAGE> 1
[PHOTO]
VANGUARD
TAX-MANAGED
FUND
Annual Report
December 31, 1996
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage
includes a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord
Nelson's flagship at The Battle of the Nile); a clock built circa 1816 in
Scotland, featuring a portrait of Nelson (who is also shown, accepting a
surrender, in a detail from a nineteenth-century engraving); and several views
of our recently completed campus, which is steeped in nautical imagery--from
our buildings named after Nelson's warships (Victory, Majestic, and Goliath are
three shown), to our artwork and ornamental compass rose.
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from-- the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
5
Performance
Summaries
7
Portfolio
Profiles
10
Financial
Statements
16
Report Of
Independent
Accountants
40
Directors And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
The U.S. stock market continued to surge during 1996--the second full
year of operation for Vanguard Tax-Managed Fund. In the twelve months ended
December 31, stocks of the biggest companies led the way as the Standard &
Poor's 500 Composite Stock Price Index provided a return of +23.0%. Municipal
bonds, meanwhile, provided modest positive returns in the face of a headwind
from rising interest rates.
In this environment, our Growth and Income Portfolio provided our
highest total return (capital change plus reinvested dividends), matching
perfectly the return of its target index, the S&P 500 Index. Our Capital
Appreciation Portfolio provided a slightly lower though still solid absolute
return. Our Balanced Portfolio reflected the stock market's banner gains and
the comparatively modest returns on municipal bonds. The table at right
compares our Portfolios with their respective unmanaged index benchmarks. The
net asset values and income dividends for each Portfolio are presented in the
table at the close of this letter. None of the Portfolios realized net capital
gains.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1996
- ----------------------------------------------------------------
<S> <C>
Tax-Managed Growth and
Income Portfolio +23.0%
S&P 500 Index +23.0
- ----------------------------------------------------------------
Tax-Managed Capital
Appreciation Portfolio +20.9%
Russell 1000 Index +22.4
- ----------------------------------------------------------------
Tax-Managed Balanced Portfolio +12.2%
Composite Index* +13.2
- ----------------------------------------------------------------
</TABLE>
*50% Russell 1000 Index, 50% Lehman Intermediate-Term Municipal
Bond Index.
1996 PERFORMANCE OVERVIEW
In a nearly ideal environment of moderate economic growth, rising corporate
profits, and continued low inflation, the U.S. stock market flourished in 1996.
Interest rates fluctuated substantially, rising early in the year along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated--and with them, inflation anxieties. However,
interest rates closed the year with a sharp upward spike in December. The yield
on the benchmark 30-year U.S. Treasury bond finished the year at 6.6%--up about
six-tenths of a percentage point from 6.0% at the end of 1995--driving the
price of the long bond down by nearly -8%.
In contrast, the price trend for common stocks was virtually one-way:
up. The S&P 500 Index provided positive returns in all but two months (July and
December). Through the first five months of 1996, small- and mid-capitalization
stocks, especially those in the technology sector, outpaced the large-cap
companies. But for the rest of the year, Wall Street's motto seemed to be
"bigger is better." For the full year, large stocks, particularly the very
biggest blue chip issues, provided the highest returns. Accordingly, the S&P
500 Index and the Russell 1000 Stock Index--both large-cap dominated--were top
performers with total returns of +23.0% and +22.4%, respectively.
Returns fell off sharply after those of the biggest stocks. The
Wilshire 4500 Equity Index of mid- and small-cap stocks returned +17.2% and the
small-cap Russell 2000 Stock Index returned +16.5%.
1
<PAGE> 4
This strong large-cap bias was a distinct advantage for our GROWTH AND
INCOME PORTFOLIO, which provided an exact match of the S&P 500 Index's return
of +23.0%. This return was fully 2.1 percentage points above the +20.9% earned
by the average growth and income mutual fund, outpacing three-fourths of them.
Though matching the Index is our goal, actually doing so is no small
task, given that our Portfolios incur the real-world costs of
investing--administrative, operating, and investment management expenses--that
do not burden the "on-paper-only" Index. Even our extremely low 0.20% expense
ratio (expenses as a percentage of average net assets) presents a challenge in
our quest to match the Index. Cost, in a nutshell, is the reason behind the
inability of most managers of active equity funds--which carry expense ratios
averaging 1.4%, plus portfolio transaction costs of perhaps 0.5%--to beat their
relevant indexes.
Our CAPITAL APPRECIATION PORTFOLIO also benefited from a concentration
in stocks of large companies. (The Russell 1000 Index tracks the 1,000 largest
U.S. stocks.) Our Portfolio's return outpaced that of the average growth mutual
fund by 1.7 percentage points (+20.9% for our Portfolio versus +19.2% for our
average competitor) but fell short of the Index's return of +22.4%.
In managing the Portfolio, we make our selections from the
lower-yielding growth stocks of the Russell 1000 Index to minimize the taxable
income you receive, while at the same time attempting to match the return of
the Index. Our shortfall against the Index in 1996 was largely the result of
our slight overweighting in mid-cap growth stocks, which started the year
strong but fizzled during the midyear sell off of technology stocks. We do not
expect the Capital Appreciation Portfolio to track the Russell 1000 Index from
year to year as closely as we expect the Growth and Income Portfolio to match
the S&P 500 Index. However, we believe that over an extended period the total
returns of the Capital Appreciation Portfolio (largely growth-oriented) and the
Growth and Income Portfolio (oriented to both growth and value) will be
comparable, although the Capital Appreciation Portfolio should provide lower
taxable income. In fact, over the brief life span of the two portfolios,
returns have been quite similar.
Our BALANCED PORTFOLIO combines a diversified list of growth-oriented
stocks--similar to those held in the Capital Appreciation Portfolio--with
high-grade, intermediate-term tax-exempt bonds. Our goal is to hold about half
of the total Portfolio in each asset class. However, for the Portfolio to
retain its tax-exempt character, municipal bonds must comprise no less than 50%
of its assets. With that in mind, we slightly overweight our bond position to
maintain a safe cushion. (Our municipal bond position averaged about 52% of
assets during 1996.)
This slight tilt toward bonds helps explain part of our shortfall
against the composite index, which is weighted for an even split between the
Russell 1000 Index and the Lehman Intermediate-Term Municipal Bond Index.
Because of the wide divergence in the returns of these components (+22.4% for
the Russell Index versus +4.4% for the Lehman Index), even a slight nod toward
bonds over stocks proved to be unfavorable.
We note that the interest income earned by the Balanced Portfolio was
fully tax-exempt and represented a yield of 5% on our average bond assets.
SOME PERSPECTIVE ON TAXES
A primary allure of our Portfolios, of course, is their tax-efficiency. We are
pleased--though not surprised--to report that all three Portfolios have so far
clearly demonstrated their edge over similar funds that focus on maximizing
pre-tax gains. We estimate that in
2
<PAGE> 5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
DIVIDEND AFTER-TAX
PORTFOLIO YIELD YIELD*
- --------------------------------------------------------------------
<S> <C> <C>
Tax-Managed Growth and Income 1.81% 1.09%
Tax-Managed Capital Appreciation 0.75 0.45
Tax-Managed Balanced 2.83 2.68
- --------------------------------------------------------------------
</TABLE>
*Assumes maximum 39.6% marginal tax rate on dividend income.
1996 taxable capital gains distributions reduced the effective return of the
average general equity fund from +19.5% on a pre-tax basis to about +16% after
taxes. In sharp contrast, Tax-Managed Fund's Portfolios have realized no
capital gains and therefore have distributed none. The table above shows the
dividend yield and after-tax yields for each of our Portfolios.
We emphasize that during a robust period in the stock market, as in
1995 and 1996, significant unrealized gains are generated. At year-end, the
Growth and Income Portfolio had net unrealized gains of $3.39 per share, or 21%
of net asset value; Capital Appreciation, $3.80 per share, or 24% of net asset
value; and Balanced, $1.99 per share, or 15% of net asset value. Though we
cannot guarantee that these gains--and any future gains--will remain
unrealized, our portfolio turnover has remained at the low levels we envisioned
for our Portfolios. In 1996, turnover for our Portfolios was a tiny fraction of
the average general equity fund's 84% turnover rate (Growth and Income, 7%
turnover; Capital Appreciation, 12%; and Balanced, 5%). As long as the indexes
we track continue to have only small changes in composition--a virtual
certainty--we expect our turnover rates to remain at minimal levels. While
avoiding taxes on these gains altogether would be ideal, we must emphasize that
even a temporary deferral of taxes--putting off the tax bill until the gains
are someday realized--provides a significant benefit for our shareholders.
Shareholders must always keep in mind that a surge in
redemptions--potentially prompted by a steep dive in the financial
markets--could force us to sell stocks and, thus, realize some of our
unrealized gains. However, by imposing redemption fees (2% on shares held less
than one year and 1% on shares held from one to five years), we hope to
minimize participation in the Fund by short-term speculators and market-timers.
So far, our strategy has paid off. Our rate of redemptions was a tiny fraction
of industry levels during the year, and our assets have continued to grow at a
moderate pace. Total assets of the three Portfolios stood at $815 million at
the end of 1996, more than enough to ensure broad diversification and low cost,
two fundamentals of the Vanguard philosophy.
LIFETIME PERFORMANCE OVERVIEW
While just above two years is far too brief a period over which to judge any
mutual fund, each of the Portfolios of Vanguard Tax-Managed Fund has begun to
etch out a pattern that we expect--though, of course, cannot guarantee--will
solidify over time: They have closely tracked their respective indexes and have
generated only a tiny amount of taxable
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TOTAL RETURNS
SEP. 6, 1994, TO DEC. 31, 1996
--------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -------------------------------------------------------------------------------
<S> <C> <C>
Tax-Managed Growth and
Income Portfolio +24.5% $16,633
Average Growth and Income Fund +20.4 15,387
S&P 500 Index +24.5 16,619
- --------------------------------------------------------------------------------
Tax-Managed Capital
Appreciation Portfolio +23.0% $16,169
Average Growth Fund +20.0 15,251
Russell 1000 Index +24.3 16,547
- --------------------------------------------------------------------------------
Tax-Managed Balanced Portfolio +14.8% $13,777
Average Balanced Fund* +15.5 13,974
Composite Index +15.6 13,999
- --------------------------------------------------------------------------------
</TABLE>
*Bond component not tax-exempt.
3
<PAGE> 6
income in the process. The table at the bottom of page 3 presents their returns
since inception, along with the growth of hypothetical $10,000 investments in
each of our Portfolios, their competitive groups, and their benchmark
standards. We note that our Balanced Portfolio's bond component is tax-exempt,
unlike that of the competitive group of balanced funds. This difference more
than accounts for our shortfall in return versus the average competing fund.
The importance of paying attention to how taxes affect mutual fund
investments may well have been pushed to the back of investors' minds during
the stock market's remarkable rise. But we are confident that when the market's
returns revert toward historical norms (read: much lower), more attention will
inevitably focus on the after-tax returns generated by mutual funds. The slice
that taxes take from your investment return will become more apparent.
Competitors in the tax-managed field, of which there was but one two years ago,
have begun to surface, a clear acknowledgment that others are coming to share
in our belief that taxes--like costs--matter.
IN SUMMARY
Most mutual fund investors understand that volatility risk is a measure of how
much an investment may fluctuate in value over a given period of time. But many
equity fund investors today have experienced only "upside volatility." The U.S.
stock market has been rising--with only a few relatively brief setbacks--for
nearly 15 years. The bond market has provided extraordinarily high returns over
the same period.
Against this backdrop, it seems appropriate to step back and assess
the outlook for the financial markets. While no one can accurately predict what
will happen over the next decade--or even the next year--it seems unlikely that
stocks and bonds will enjoy a repeat of the exceptional returns of this
remarkable era. Indeed, there are sure to be some rough seas ahead.
Nonetheless, we believe that investors who maintain a balanced portfolio of
stock funds, bond funds, and money market funds will withstand the volatility
of the financial markets and be rewarded. Shareholders in our Tax-Managed
Portfolios will find part of their reward in the tax-efficiency that comes from
our strategy of combining low-cost indexed investing with policies designed to
minimize net realized capital gains. "Stay the course" has proved wise counsel
in the past, and we see no reason why it should not continue to be in the
future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
January 24, 1997
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
DECEMBER 31, DISTRIBUTIONS FROM DIVIDENDS FROM
-------------------------- NET REALIZED NET INVESTMENT
PORTFOLIO 1995 1996 CAPITAL GAINS INCOME
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Managed Growth and Income $13.16 $15.89 $0.00 $0.28
Tax-Managed Capital Appreciation 13.28 15.95 0.00 0.11
Tax-Managed Balanced 11.85 12.92 0.00 0.36
- --------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500
Composite Stock Price Index up by 23.0%. When the two years are considered
cumulatively, the S&P 500 Index has risen 69.2%. Not surprisingly, many of the
factors that drove the market higher in 1995 were still at work: Once again,
steady economic growth, low inflation, and solid earnings growth were powerful
motivators.
The market's gains, however, were far from evenly distributed.
Investors strongly favored larger companies, such as those that dominate the
S&P 500 Index. In fact, even within the Index, it was the largest companies
that prevailed: The 50 biggest (which account for roughly half the Index's
market value) gained 26.7% in 1996, compared with an increase of 23.0% for the
entire Index. Looking at the S&P 500 Index's performance by sector, technology
stocks were strongest, closing the year with a 42.5% gain. Financial stocks
were a close second, gaining 35.5%. Utilities, plagued early in the year by
higher interest rates and a rapidly changing competitive landscape, eked out a
meager 1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues
could not keep pace. This was evidenced in the considerable difference between
the 23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000
Index of small stocks. Even for the smaller companies, there was a significant
range of performance among sectors. Energy stocks led the Russell 2000 Index
with a 62.0% gain for the year. Here, rising prices, limited exposure to the
cyclical refining business, and a reduced number of competitors created a
favorable environment for the stocks. At the other end of the spectrum were
health-care stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
-------------------------------------
1 YEAR 3 YEARS 5 YEARS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- ----------------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- ----------------------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- ----------------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due
to indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no
reason to boost inter-
5
<PAGE> 8
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996,
indexes were able to finish the year with positive total returns. Although the
specter of the Federal Reserve Board loomed large during the year, in fact the
Board acted only once, lowering the federal funds rate by a total of 0.25% in
January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year
benefited another large segment of the bond market--mortgage-backed
securities--as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts. The sector was shielded to a certain
extent from the inflation wars of the Treasury market, as demand outstripped
supply for much of the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the Euro-pean and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the
European and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing
concern about the health of the Japanese economy. Growth in Japan has remained
modest at best for several years despite government efforts to stimulate the
economy through public works programs and tax incentives. In Europe, the
picture was dramatically different, with the region benefiting from a variety
of factors. Among the most important were (1) ongoing efforts to lower
government deficits consistent with the Maastricht Treaty guidelines, (2)
improving economic growth, and (3) a greater commitment by corporate executives
to increasing "shareholder value."
6
<PAGE> 9
PERFORMANCE SUMMARY: BALANCED PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 9/6/94-12/31/96
- ----------------------------------------------------------------
BALANCED PORTFOLIO COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -2.3% 0.9% -1.4% -1.5%
1995 21.0 3.5 24.5 25.5
1996 9.0 3.2 12.2 13.2
- ----------------------------------------------------------------
</TABLE>
*50% Russell 1000 Index, 50% Lehman Intermediate-Term Municipal Bond Index.
See Financial Highlights table on page 36 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 9/6/94-12/31/96
- ---------------------------------------------------------------------------------------------------
VTMF- LIPPER TAX-MANAGED LEHMAN
BALANCED BALANCED BALANCED BROTHERS MUNICIPAL RUSSELL 1000
PORTFOLIO FUNDS AVERAGE COMPOSITE INTERMEDIATE-TERM BOND INDEX STOCK INDEX
<S> <C> <C> <C> <C> <C> <C>
1994 09 10000 10000 10000 10000 10000
1995 03 10576 10409 10580 10343 10742
1995 09 11949 11804 11883 10940 12800
1996 03 12589 12611 12680 11175 14258
1996 09 13196 13275 13311 11425 15324
1994 12 9860 9812 9854 9827 9809
1995 06 11255 11163 11225 10636 11753
1995 12 12278 12292 12364 11215 13513
1996 06 12860 12895 12966 11223 14840
1996 12 13777 13974 13999 11704 16547
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCED PORTFOLIO* 12.21% 14.82% $13,777
AVERAGE BALANCED FUND 13.76 15.53 13,974
COMPOSITE INDEX** 13.22 15.62 13,999
RUSSELL 1000 INDEX 22.45 24.27 16,547
LEHMAN INTERMEDIATE-TERM
MUNICIPAL BOND INDEX 4.36 7.03 11,704
- ------------------------------------------------------------------------------------------
</TABLE>
*Returns exclude the redemption fee of 2% on shares held for less than one
year and 1% for shares held from one to five years.
**50% Russell 1000 Index, 50% Lehman Intermediate-Term Municipal Bond Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced Portfolio* 9/6/94 12.21% 11.59% 3.23% 14.82%
- --------------------------------------------------------------------------------------
</TABLE>
*Returns exclude the redemption fee of 2% on shares held for less than one year
and 1% for shares held from one to five years.
7
<PAGE> 10
PERFORMANCE SUMMARY: GROWTH AND INCOME PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 9/6/94-12/31/96
- --------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -2.6% 0.9% -1.7% -1.8%
1995 34.7 2.8 37.5 37.6
1996 20.7 2.3 23.0 23.0
- --------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 37 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 9/6/94-12/31/96
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
---------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH AND INCOME PORTFOLIO* 23.03% 24.55% $16,633
AVERAGE GROWTH AND INCOME FUND 20.91 20.43 15,387
S&P 500 INDEX 22.96 24.50 16,619
- --------------------------------------------------------------------------------------------------
</TABLE>
*Returns exclude the redemption fee of 2% on shares held for less than one year
and 1% for shares held from one to five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth and Income Portfolio* 9/6/94 23.03% 21.96% 2.59% 24.55%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
*Returns exclude the redemption fee of 2% on shares held for less than one year
and 1% for shares held from one to five years.
8
<PAGE> 11
PERFORMANCE SUMMARY: CAPITAL APPRECIATION PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
TOTAL INVESTMENT RETURNS: 9/6/94-12/31/96
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO RUSSELL 1000
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -0.9% 0.4% -0.5% -1.3%
1995 33.5 0.9 34.4 37.8
1996 20.1 0.8 20.9 22.4
- ------------------------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 37 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 9/6/94-12/31/96
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL APPRECIATION PORTFOLIO* 20.92% 23.04% $16,169
AVERAGE GROWTH FUND 19.24 19.97 15,251
RUSSELL 1000 INDEX 22.45 24.27 16,547
- --------------------------------------------------------------------------------------------
</TABLE>
*Returns exclude the redemption fee of 2% on shares held for less than one year
and 1% for shares held from one to five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- ----------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Appreciation Portfolio* 9/6/94 20.92% 22.10% 0.94% 23.04%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*Returns exclude the redemption fee of 2% on shares held for less than one year
and 1% for shares held from one to five years.
9
<PAGE> 12
PORTFOLIO PROFILE: BALANCED PORTFOLIO
DECEMBER 31, 1996
This Profile provides a snapshot of the Portfolio's equity and fixed-income
characteristics, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on pages 12 and 13.
<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- ------------------------------------------------
<S> <C>
Turnover Rate 5%
Expense Ratio 0.20%
Cash Reserves 0.0%
</TABLE>
EQUITY INVESTMENT FOCUS
- ------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- ----------------------------------------------------------------
RUSSELL
BALANCED 1000
- ----------------------------------------------------------------
<S> <C> <C>
Number of Stocks 451 991
Median Market Cap $11.2B $17.8B
Price/Earnings Ratio 21.5x 19.6x
Price/Book Ratio 3.8x 3.4x
Yield 2.8% 1.9%
Return on Equity 20.1% 19.4%
Earnings Growth Rate 18.0% 14.4%
Foreign Holdings 0.1% --
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF COMMON STOCK)
- ------------------------------------------------
<S> <C>
General Electric Co. 2.7%
The Coca-Cola Co. 2.4
Exxon Corp. 2.2
Intel Corp. 1.8
Merck & Co., Inc. 1.7
International Business Machines Corp. 1.4
Procter & Gamble Co. 1.4
Johnson & Johnson 1.2
Microsoft Corp. 1.2
E.I. du Pont de Nemours & Co. 1.0
- ------------------------------------------------
Top Ten 17.0%
Top Ten as % of Total Net Assets 8.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------------------
BALANCED BALANCED
------------------------------------------------
<S> <C> <C>
Basic Materials . . . . . . . . 4.8% 5.9%
Capital Goods & Construction . . 8.8 8.5
Consumer Cyclical . . . . . . . 16.4 15.0
Consumer Staples . . . . . . . . 9.8 9.6
Energy . . . . . . . . . . . . . 5.9 7.7
Financial . . . . . . . . . . . 8.4 11.0
Health Care . . . . . . . . . . 14.9 11.7
Technology . . . . . . . . . . . 20.9 20.3
Transport & Services . . . . . . 2.2 2.7
Utilities . . . . . . . . . . . 5.0 4.5
Miscellaneous . . . . . . . . . 2.9 3.1
- ------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- --------------------------------------------------------
<S> <C>
Number of Bonds 47
Yield to Maturity* 4.4%
Average Coupon 5.7%
Average Maturity 6.4 years
Average Quality Aa1
Average Duration 5.1 years
</TABLE>
*After expenses.
FIXED-INCOME INVESTMENT FOCUS
- --------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF BONDS)
- -------------------------------------
<S> <C>
Under 1 Year 12.2%
1-5 Years 82.8
5-10 Years 5.0
10-20 Years --
20-30 Years --
Over 30 Years --
- -------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- -------------------------------------
<S> <C>
Aaa 73.2%
Aa 7.2
A 11.1
Baa 8.5
Ba --
B --
Not Rated --
- -------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
LARGEST STATE CONCENTRATIONS (% OF BONDS)
- -----------------------------------------
<S> <C>
California 19.6%
Michigan 11.7
New York 9.4
Massachusetts 8.7
Texas 8.2
Pennsylvania 7.0
Alaska 6.2
Ohio 5.2
New Jersey 5.2
District of Columbia 4.4
- -----------------------------------------
Total 85.6%
</TABLE>
11
<PAGE> 14
[PHOTO]
AVERAGE COUPON. The average interest rate, expressed as a percentage of face
value, paid on the securities held by a portfolIO.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To estimate the price
sensitivity of a portfolio, multiply its duration by the change in rates. If
interest rates rise by one percentage point, the share price of a portfolio
with an average duration of five years would decline by about 5%. If rates
decrease by a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity and are repaid. In general, the longer the average maturity, the
more a portfolio's share price will fluctuate in response to changes in market
interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies assign ratings after appraising an issuer's ability to
meet its obligations. Quality is graded on a scale, with Aaa indicating the
most creditworthy bond issuers.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.
DISTRIBUTION BY CREDIT QUALITY. An indicator of the risk of default or other
credit problems on securities held by a portfolio.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's
share price will fluctuate in response to changes in interest rates. Callable
securities trading at premium to par value are treated as coming due on their
earliest redemption date.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of an equity portfolio
in terms of two attributes--market capitalization (large, medium, or small) and
relative valuation (growth, value, or a blend). For instance, if the upper
right box of the grid is shaded, it indicates that the portfolio emphasizes
large-capitalization growth stocks.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a balanced
portfolio's fixed-income segment in terms of two attributes--average maturity
(short, medium, or long) and average credit quality (high, medium, or low).
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside the United
States.
LARGEST STATE CONCENTRATIONS. An indicator of diversification. The less
concentrated a portfolio's holdings of bonds, the less the portfolio will be
hurt by a drop in bond prices caused by financial problems in a single state or
region.
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio
have higher market capitalizations and half lower.
NUMBER OF BONDS. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from
the problems of a particular issue.
12
<PAGE> 15
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies represented in the portfolio.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of an equity portfolio's total net assets
or a balanced portfolio's equity assets in its ten largest investments (the
average for stock mutual funds is about 25%). As this percentage rises, a
portfolio's returns are likely to be more volatile, since its return is more
dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to realize and distribute capital gains (which are taxable to
investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned over the past 30 days and is annualized, or projected forward
for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
13
<PAGE> 16
PORTFOLIO PROFILE: GROWTH AND INCOME PORTFOLIO
DECEMBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on pages 12 and 13.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------
GROWTH AND
INCOME S&P 500
- --------------------------------------------------------
<S> <C> <C>
Number of Stocks 516 500
Median Market Cap $25.6B $24.5B
Price/Earnings Ratio 19.6x 19.6x
Price/Book Ratio 3.4x 3.4x
Yield 1.8% 2.0%
Return on Equity 19.7% 19.6%
Earnings Growth Rate 13.5% 13.5%
Foreign Holdings 3.7% 3.7%
Turnover Rate 7% --
Expense Ratio 0.20% --
Cash Reserves 0.0% --
</TABLE>
EQUITY INVESTMENT FOCUS
- ------------------------------------------
[CHART]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ---------------------------------------------------------
<S> <C>
General Electric Co. 3.0%
The Coca-Cola Co. 2.3
Exxon Corp. 2.2
Intel Corp. 2.0
Microsoft Corp. 1.8
Merck & Co., Inc. 1.7
Royal Dutch Petroleum Co. ADR 1.6
Philip Morris Cos., Inc. 1.6
International Business Machines Corp. 1.5
Procter & Gamble Co. 1.3
- ---------------------------------------------------------
Top Ten 19.0%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------------------------------
GROWTH AND GROWTH AND
INCOME INCOME S&P 500
----------------------------------------------------
<S> <C> <C> <C>
Basic Materials . . . . . . . . 6.6% 5.9% 6.2%
Capital Goods & Construction . . 8.4 8.5 8.4
Consumer Cyclical . . . . . . . 12.5 12.2 12.1
Consumer Staples . . . . . . . . 12.4 12.1 12.4
Energy . . . . . . . . . . . . . 9.7 9.6 9.7
Financial . . . . . . . . . . . 13.3 14.8 15.0
Health Care . . . . . . . . . . 11.0 10.3 10.4
Technology . . . . . . . . . . . 9.4 13.4 12.1
Transport & Services . . . . . . 1.6 1.4 1.5
Utilities . . . . . . . . . . . 13.0 9.8 9.9
Miscellaneous . . . . . . . . . 2.1 2.0 2.3
- --------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
PORTFOLIO PROFILE: CAPITAL APPRECIATION PORTFOLIO
DECEMBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on pages 12 and 13.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------
CAPITAL RUSSELL
APPRECIATION 1000
- -----------------------------------------------------------------
<S> <C> <C>
Number of Stocks 509 991
Median Market Cap $8.3B $17.8B
Price/Earnings Ratio 22.2x 19.6x
Price/Book Ratio 3.7x 3.4x
Yield 0.8% 1.9%
Return on Equity 20.3% 19.4%
Earnings Growth Rate 18.2% 14.4%
Foreign Holdings 0.1% --
Turnover Rate 12% --
Expense Ratio 0.20% --
Cash Reserves 0.1% --
</TABLE>
EQUITY INVESTMENT FOCUS
- -----------------------------------------------------------------
[CHART]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------
<S> <C>
General Electric Co. 2.7%
The Coca-Cola Co. 2.2
Intel Corp. 2.0
Merck & Co., Inc. 1.7
Exxon Corp. 1.5
International Business Machines Corp. 1.4
Procter & Gamble Co. 1.3
Microsoft Corp. 1.3
Philip Morris Cos., Inc. 1.2
Johnson & Johnson 1.2
- -----------------------------------------------------
Top Ten 16.5%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ----------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------------
CAPITAL CAPITAL
APPRECIATION APPRECIATION
------------------------------------------
<S> <C> <C>
Basic Materials . . . . . . . . 5.2% 5.0%
Capital Goods & Construction . . 8.7 9.3
Consumer Cyclical . . . . . . . 17.2 16.9
Consumer Staples . . . . . . . . 9.4 9.3
Energy . . . . . . . . . . . . . 5.8 5.8
Financial . . . . . . . . . . . 9.1 10.3
Health Care . . . . . . . . . . 13.6 12.6
Technology . . . . . . . . . . . 20.2 22.5
Transport & Services . . . . . . 2.4 2.3
Utilities . . . . . . . . . . . 5.6 3.0
Miscellaneous . . . . . . . . . 2.8 3.0
- ----------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
[PHOTO]
FINANCIAL STATEMENTS
DECEMBER 31, 1996
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period. The
Balanced and Capital Appreciation Portfolios' common stocks are grouped and
subtotaled by industry sector; the Growth and Income Portfolio's S&P 500 Index
common stocks are listed in descending market value order. The Balanced
Portfolio's municipal bond holdings are grouped and subtotaled by state. Other
assets are added to, and liabilities are subtracted from, the value of Total
Investments to calculate the Portfolio's Net Assets. Finally, Net Assets are
divided by the outstanding shares of the Portfolio to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets of each Portfolio, you will
find a table displaying the composition of the Portfolio's net assets on both a
dollar and per-share basis. Because all income and any realized gains must be
distributed to shareholders each year, the bulk of net assets consists of Paid
in Capital (money invested by shareholders). The amounts shown for
Undistributed Net Investment Income and Accumulated Net Realized Gains usually
approximate the sums the Portfolio had available to distribute to shareholders
as income dividends or capital gains as of the statement date. Any Accumulated
Net Realized Losses, and any cumulative excess of distributions over net income
or net realized gains, will appear as negative balances. Unrealized
Appreciation (Depreciation) is the difference between the market value of the
Portfolio's investments and their cost, and reflects the gains (losses) that
would be realized if the Portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (47.8%)
- ----------------------------------------------------------------------------------
BASIC MATERIALS (2.8%)
# Airgas, Inc. 2,700 $ 59
Albemarle Corp. 2,300 42
Allegheny Teledyne Inc. 577 13
# Alumax, Inc. 1,700 57
Aluminum Co. of America 1,100 70
# Bethlehem Steel Corp. 350 3
Champion International Corp. 1,300 56
E.I. du Pont de Nemours & Co. 3,300 312
# FMC Corp. 400 28
# Fort Howard Corp. 2,400 66
Freeport-McMoRan Copper &
Gold Inc. Class B 1,263 38
Freeport-McMoRan, Inc. 816 26
Georgia Gulf Corp. 1,500 40
W.R. Grace & Co. 900 47
Great Lakes Chemical Corp. 400 19
Homestake Mining Co. 200 3
IMC Global Inc. 1,200 47
International Paper Co. 1,900 77
# International Specialty
Products, Inc. 4,500 55
Kimberly-Clark Corp. 1,536 146
Louisiana-Pacific Corp. 600 13
LTV Corp. 1,000 12
Mallinckrodt Inc. 1,000 44
Monsanto Co. 2,500 97
Morton International, Inc. 1,500 61
Newmont Gold Co. 200 9
Newmont Mining Corp. 400 18
Nucor Corp. 1,000 51
Praxair, Inc. 1,500 69
Reynolds Metals Co. 900 51
St. Joe Corp. 700 46
Santa Fe Pacific Gold Corp. 1,640 25
A. Schulman Inc. 700 17
Sigma Aldrich Corp. 1,000 62
Stone Container Corp. 400 6
-------------
1,785
-------------
CAPITAL GOODS & CONSTRUCTION (4.1%)
AGCO Corp. 1,400 40
The Boeing Co. 2,200 234
Caterpillar, Inc. 1,400 105
Centex Corp. 200 7
Clayton Homes Inc. 2,539 34
Cummins Engine Co., Inc. 400 18
Danaher Corp. 1,000 47
Duracell International, Inc. 500 35
Emerson Electric Co. 1,200 116
Fluor Corp. 800 50
General Electric Co. 8,200 811
# General Instrument Corp. 400 9
W.W. Grainger, Inc. 600 48
Illinois Tool Works, Inc. 800 64
Lockheed Martin Corp. 1,300 119
Martin Marietta Materials, Inc. 400 9
McDonnell Douglas Corp. 1,800 115
Millipore Corp. 400 17
Owens Corning 700 30
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Raychem Corp. 200 $ 16
Raytheon Co. 1,800 87
# Republic Industries, Inc. 2,000 62
Schuller Corp. 2,500 27
Thermo Electron Corp. 1,850 76
# Thermo Fibertek, Inc. 1,800 17
# Thermo Instrument Systems, Inc. 1,312 43
Tyco International Ltd. 1,434 76
# USG Corp. 1,100 37
WMX Technologies Inc. 3,000 98
Westinghouse Electric Corp. 3,600 72
Wheelabrator Technologies, Inc. 1,500 24
York International Corp. 600 34
-------------
2,577
-------------
CONSUMER CYCLICAL (7.2%)
# AutoZone, Inc. 2,300 63
# BHC Communications, Inc. Class A 300 30
Bandag, Inc. 300 14
# Barnes & Noble Inc. 700 19
# Bed Bath & Beyond, Inc. 400 10
# Brinker International, Inc. 900 14
# CUC International, Inc. 3,300 78
# CableVision Systems Corp. Class B 200 6
# Choice Hotels Corp. Inc. 800 14
# Chris-Craft Industries, Inc. 742 31
Chrysler Corp. 3,732 123
Circuit City Stores, Inc. 1,000 30
# Circus Circus Enterprises Inc. 1,700 58
# Coleman Inc. 1,400 19
Comcast Corp. Class A Special 2,400 43
# Consolidated Stores, Inc. 1,750 56
# Cox Communications Class A 2,400 56
Cracker Barrel Old Country
Stores, Inc. 1,100 28
Dillard Department Stores Class A 1,600 49
The Walt Disney Co. 2,700 188
Eastman Kodak Co. 2,000 161
# Eckerd Corp. 785 25
# Electronic Arts Inc. 1,200 36
Fastenal Co. 400 18
# Federated Department Stores 1,800 61
Ford Motor Co. 5,300 169
# Fruit of the Loom, Inc. 900 34
The Gap, Inc. 2,000 60
General Motors Corp. 4,200 234
# General Nutrition Cos., Inc. 3,300 56
# GTech Holdings Corp. 1,700 54
# HFS Inc. 1,800 108
# HSN, Inc. 900 21
Harley-Davidson, Inc. 1,400 66
# Harrah's Entertainment, Inc. 700 14
Hasbro, Inc. 900 35
Home Depot, Inc. 2,900 145
# Host Marriott 2,100 34
# Host Marriott Services 420 4
# ITT Corp. 600 26
ITT Industries, Inc. 600 15
# Infinity Broadcasting Corp. 3,075 103
International Game Technology 200 4
# Jones Apparel Group, Inc. 1,800 67
# Kmart Corp. 4,800 50
# K-III Communications Corp. 1,400 15
# King World Productions, Inc. 1,600 59
# Kohls Corp. 1,200 47
La Quinta Inns Inc. 450 9
# Lear Corp. 1,100 38
# Liberty Media Group Class A 675 19
The Limited, Inc. 1,469 27
# Lin Television 750 32
Lowe's Cos., Inc. 1,400 50
# LucasVarity PLC ADR 1,656 63
# MGM Grand Inc. 800 28
Marriott International 1,200 66
# Marvel Entertainment Group 700 1
Mattel, Inc. 2,187 61
McDonald's Corp. 3,400 154
# Micro Warehouse Inc. 300 3
# Mirage Resorts, Inc. 2,700 58
Newell Co. 1,800 57
Nike, Inc. Class B 1,200 72
# Nine West Group, Inc. 800 37
Nordstrom, Inc. 500 18
# Office Depot, Inc. 1,000 18
# Officemax Inc. 2,100 22
# Outback Steakhouse 100 3
Pep Boys (Manny, Moe & Jack) 200 6
# PETsMART, Inc. 1,800 39
# Price/Costco Inc. 2,400 60
# Promus Hotel Corp. 400 12
Reebok International Ltd. 100 4
# Revco Drug Stores, Inc. 1,100 41
Rubbermaid, Inc. 1,800 41
Russell Corp. 600 18
# Scholastic Corp. 600 40
# Spiegel, Inc. Class A 5,800 41
# Staples, Inc. 2,250 41
Sunbeam Corp. 900 23
Talbots Inc. 50 1
Tandy Corp. 100 5
# Tele-Communications, Inc.
Class A 2,000 26
Time Warner, Inc. 3,200 120
# Toys R Us, Inc. 2,100 63
# U S WEST Media Group 4,000 74
# Viacom International Inc. Class A 548 19
# Viacom International Inc. Class B 1,763 61
# Viking Office Products 1,400 37
Wal-Mart Stores, Inc. 7,000 160
Walgreen Co. 2,000 80
Warnaco Group 1,300 39
-------------
4,537
-------------
CONSUMER STAPLES (4.6%)
Alberto-Culver Co. Class B 800 38
Albertson's, Inc. 2,000 71
Archer-Daniels-Midland Co. 4,914 108
The Coca-Cola Co. 13,600 716
Coca-Cola Enterprises, Inc. 1,300 63
Crown Cork & Seal Co., Inc. 900 49
Dole Food Co. 400 14
Gillette Co. 2,900 225
IBP, Inc. 2,100 51
# Jefferson Smurfit Corp. 4,100 66
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Kellogg Co. 400 $ 26
# The Kroger Co. 1,400 65
# Owens-Illinois, Inc. 2,000 46
PepsiCo, Inc. 9,000 263
Philip Morris Cos., Inc. 2,100 236
Procter & Gamble Co. 3,800 409
RJR Nabisco Holdings Corp. 1,460 50
# Safeway, Inc. 2,400 103
Schweitzer-Mauduit
International, Inc. 600 19
# Southland Corp. 17,200 50
# Starbucks Corp. 400 11
Sysco Corp. 1,500 49
Tyson Foods, Inc. 1,600 55
# Vons Cos., Inc. 1,100 66
Wrigley, (Wm.) Jr. Co. 800 45
-------------
2,894
-------------
ENERGY (3.7%)
Amerada Hess Corp. 1,200 69
Amoco Corp. 2,900 233
Anadarko Petroleum Corp. 600 39
Burlington Resources, Inc. 1,100 55
# CalEnergy Inc. 1,500 50
# Chesapeake Energy Corp. 800 45
Coastal Corp. 1,500 73
# Diamond Offshore Drilling, Inc. 800 46
El Paso Natural Gas 111 6
Enron Oil & Gas Co. 1,600 40
# ENSCO International, Inc. 1,000 48
ENSERCH Corp. 2,100 48
Exxon Corp. 6,700 657
# Global Marine, Inc. 2,500 52
Mobil Corp. 2,300 281
NGC Corp. 2,800 65
Noble Affiliates, Inc. 1,200 57
# Oryx Energy Co. 2,500 62
Pogo Producing Co. 1,200 57
# Rowan Cos., Inc. 2,900 66
# Santa Fe Energy Resources, Inc. 3,300 46
# Seagull Energy Corp. 900 20
# Smith International, Inc. 1,400 63
Transocean Offshore Inc. 800 50
Union Pacific Resources Group, Inc. 304 9
# Weatherford Enterra Inc. 1,100 33
# Western Atlas Inc. 900 64
-------------
2,334
-------------
FINANCIAL (5.2%)
AFLAC, Inc. 1,800 77
Advanta Corp. Class A 200 9
Aetna Inc. 269 22
Aetna Inc. Pfd. 6.25% Series C 89 7
American International Group, Inc. 2,400 260
BankAmerica Corp. 2,300 229
# CNA Financial Corp. 400 43
Capital One Financial Corp. 900 32
Citicorp 2,900 299
Conseco Co., Inc. 1,208 77
# ContiFinancial Corp. 1,700 61
Dean Witter Discover & Co. 1,200 80
# Dime Bancorp, Inc. 4,000 59
The Equitable Cos. 1,600 39
Federal Home Loan
Mortgage Corp. 1,100 121
Federal National Mortgage Assn. 5,700 212
First Empire State Corp. 500 144
First USA Inc. 2,000 69
Franklin Resources Corp. 1,000 68
General Re Corp. 400 63
Golden West Financial Corp. 900 57
Green Tree Financial Corp. 1,600 62
ITT Hartford Group, Inc. 1,000 68
Lehman Brothers Holdings, Inc. 400 13
Leucadia National Corp. 1,200 32
MGIC Investment Corp. 700 53
Merrill Lynch & Co., Inc. 1,200 98
The Money Store 800 22
Morgan Stanley Group, Inc. 1,200 69
The PMI Group Inc. 800 44
Price Enterprises, Inc. 1,400 24
Progressive Corp. of Ohio 1,000 67
Salomon, Inc. 500 24
Charles Schwab Corp. 2,000 64
State Street Boston Corp. 1,200 77
SunAmerica Inc. 600 27
Transatlantic Holdings 400 32
Travelers/Aetna Property Casualty
Corp. Class A 1,200 42
Travelers Group Inc. 3,800 172
20th Century Industries of CA 1,300 22
UNUM Corp. 900 65
Wells Fargo & Co. 600 162
Zions Bancorp. 400 41
-------------
3,308
-------------
HEALTH CARE (5.6%)
Abbott Laboratories 4,100 209
# ALZA Corp. 1,100 29
# Amgen, Inc. 1,900 103
# Apria Healthcare 2,500 47
Becton, Dickinson & Co. 1,200 52
# Beverly Enterprises Inc. 2,200 28
# Biogen, Inc. 1,200 46
Biomet, Inc. 1,600 24
# Boston Scientific Corp. 1,100 66
Cardinal Health, Inc. 1,350 79
# Centocor, Inc. 1,200 43
# Chiron Corp. 1,940 36
Columbia/HCA Healthcare Corp. 4,302 175
Dentsply International 1,200 57
# FHP International Corp. 1,400 52
# Forest Laboratories, Inc. 300 10
# Foundation Health Co. 1,300 41
# Fresenius Medical Care AG ADR 944 26
# Genzyme Corp. 2,300 50
# Genzyme Corp. Tissue Repair 108 1
Guidant Corp. 900 51
# Health Management Associates
Class A 2,250 51
# Health Systems 1,400 35
# Healthcare & Retirement Corp. 1,900 54
# HealthCare Compare Corp. 1,200 51
# Healthsource, Inc. 600 8
# HEALTHSOUTH Corp. 1,700 66
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
# Humana, Inc. 2,000 $ 38
IVAX Corp. 1,200 12
Johnson & Johnson 7,402 368
Manor Care Inc. 800 22
# Medaphis Corp. 700 8
# Medpartners Inc. 1,452 30
Medtronic, Inc. 1,600 109
Merck & Co., Inc. 6,300 499
# OrNda Healthcorp 1,900 55
# Oxford Health Plan 1,600 94
# Pacificare Health Systems Inc.
Class A 400 32
# Pacificare Health Systems Inc.
Class B 100 8
Pfizer, Inc. 3,100 257
Pharmacia & Upjohn, Inc. 2,500 99
# Quorum Health Group, Inc. 2,100 62
# St. Jude Medical, Inc. 1,200 51
# R. P. Scherer Corp. 1,000 50
Stryker Corp. 1,200 36
# Sybron International Corp. 2,000 66
# Tenet Healthcare Corp. 2,562 56
United Healthcare Corp. 800 36
United States Surgical Corp. 1,300 51
# Value Health, Inc. 100 2
Wellpoint Health Networks Inc.
Class A 233 8
-------------
3,539
-------------
TECHNOLOGY (9.7%)
# ADC Telecommunications, Inc. 1,900 59
# Adaptec, Inc. 1,800 72
Adobe Systems, Inc. 100 4
# Adtran, Inc. 400 17
# Advanced Micro Devices, Inc. 500 13
# Amdahl Corp. 2,300 28
# American Power Conversion Corp. 100 3
# Amphenol Corp. 2,900 65
# Analog Devices, Inc. 1,500 51
# Andrew Corp. 900 48
# Apple Computer, Inc. 1,100 23
# Applied Materials, Inc. 1,200 43
# Arrow Electronics, Inc. 700 37
# Ascend Communications, Inc. 1,000 62
# Associated Group, Inc. 50 1
# Associated Group, Inc. Class B 50 1
# Atmel Corp. 1,200 40
Automatic Data Processing, Inc. 2,000 86
# BMC Software, Inc. 2,000 83
# Bay Networks Inc. 1,035 22
# Cabletron Systems, Inc. 1,300 43
# Cascade Communications Corp. 1,200 66
# Ceridian Corp. 800 32
# Cirrus Logic 1,600 25
# Cisco Systems, Inc. 4,600 293
# Compaq Computer Corp. 2,100 156
Computer Associates
International, Inc. 2,025 101
# Computer Sciences Corp. 900 73
# DSC Communications Corp. 700 12
# Dell Computer 2,400 127
# Digital Equipment Corp. 1,500 55
# EMC Corp. 2,000 66
Electronic Data Systems Corp. 1,900 82
First Data Corp. 3,184 116
# FIserv, Inc. 1,400 51
# Gateway 2000 Inc. 1,100 59
# Glenayre Technologies, Inc. 1,350 29
HBO & Co. 1,200 71
Hewlett-Packard Co. 4,000 201
# Informix Corp. 1,800 37
# Input/Output, Inc. 1,600 30
Intel Corp. 4,200 550
International Business
Machines Corp. 2,800 423
# Intuit, Inc. 400 13
# KLA Instruments Corp. 400 14
# Komag, Inc. 1,900 51
# LSI Logic Corp. 1,800 48
# LAM Research Corp. 300 8
Lucent Technologies, Inc. 2,119 98
# MEMC Electronic Materials, Inc. 2,800 63
# MFS Communications Co., Inc. 1,900 103
# Marquette Medical Systems
Class A 400 9
# Maxim Integrated Products, Inc. 400 17
Micron Technology Inc. 1,200 35
# Microsoft Corp. 4,400 363
Molex, Inc. 937 36
Motorola, Inc. 1,500 92
# National Semiconductor Corp. 1,300 32
# Nextel Communications 900 12
# Novell, Inc. 2,900 27
# Octel Communications Corp. 1,900 33
# Oracle Corp. 3,300 137
# Paging Network, Inc. 2,400 37
# Pairgain Technologies, Inc. 1,400 43
# PanAmSat Corp. 1,200 34
# Parametric Technology Corp. 1,600 82
# Peoplesoft Inc. 1,000 48
# Premisys Communications, Inc. 1,000 34
# Qualcomm, Inc. 1,000 40
# Quantum Corp. 2,500 71
Scientific-Atlanta, Inc. 200 3
# Seagate Technology 4,790 189
Sensormatic Electronics Corp. 50 1
# Silicon Graphics, Inc. 2,200 56
# Solectron Corp. 800 43
# Storage Technology Corp. 800 38
# Sun Microsystems, Inc. 3,600 92
# Sybase, Inc. 300 5
# Synopsys, Inc. 1,200 55
# TCI Satellite Entertainment, Inc.
Class A 200 2
# Tandem Computers, Inc. 600 8
# Tellabs, Inc. 2,400 90
# Teradyne, Inc. 3,600 88
Texas Instruments, Inc. 1,300 83
# 3 Com Corp. 1,200 88
# 360 Communications Co. 2,066 48
# U.S. Robotics Corp. 800 58
# Unisys Corp. 1,700 11
# United States Cellular 1,200 33
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Varian Associates, Inc. 200 $ 10
# Vishay Intertechnology, Inc. 1,323 31
# Xilinx, Inc. 1,200 44
-------------
6,112
-------------
TRANSPORT & SERVICES (1.3%)
# AMR Corp. 800 70
# Atlas Air, Inc. 1,000 47
Burlington Northern Santa Fe Corp. 1,246 108
Consolidated Freightways Corp. 450 4
# Consolidated Freightways, Inc. 900 20
Delta Air Lines, Inc. 500 35
# Federal Express Corp. 1,400 62
# Fritz Cos., Inc. 3,800 47
Kansas City Southern
Industries, Inc. 1,000 45
# Newport News Shipbuilding Inc. 240 4
# Northwest Airlines Corp. Class A 1,200 47
Pittston Brink's Group 800 22
Pittston Burlington Group 400 8
Southwest Airlines Co. 1,600 36
# UAL Corp. 1,200 75
Union Pacific Corp. 359 21
# USAir Group, Inc. 3,800 89
# Wisconsin Central
Transportation Corp. 1,800 71
-------------
811
-------------
UTILITIES (2.2%)
# AES Corp. 1,400 65
AT&T Corp. 4,300 187
# AirTouch Communications, Inc. 4,000 101
BellSouth Corp. 6,000 242
Century Telephone Enterprises, Inc. 1,500 46
CINergy Corp. 1,700 57
Columbia Gas Systems, Inc. 1,000 64
Frontier Corp. 1,600 36
# LCI International, Inc. 1,400 30
MCI Communications Corp. 4,700 153
# Niagara Mohawk Power Corp. 5,900 58
SBC Communications Inc. 1,772 92
Sprint Corp. 3,200 128
Telephone & Data Systems, Inc. 500 18
# WorldCom, Inc. 3,562 93
-------------
1,370
-------------
MISCELLANEOUS (1.4%)
Alco Standard Corp. 1,200 62
# Alleghany Corp. 206 44
AlliedSignal Inc. 1,700 114
Cintas Corp. 200 12
Cognizant Corp. 1,700 56
# Coltec Inc. 1,100 21
# Imation Corp. 920 26
# Litton Industries, Inc. 1,200 57
Loews Corp. 800 75
Manpower Inc. 900 29
Mark IV Industries, Inc. 441 10
Minnesota Mining &
Manufacturing Co. 2,500 207
Olsten Corp. 300 5
# Robert Half International, Inc. 1,100 38
Stewart Enterprises, Inc. Class A 1,500 51
Tenneco, Inc. 1,200 54
Total System Services, Inc. 800 21
-------------
882
-------------
- ----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $21,259) 30,149
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (54.0%)
- ----------------------------------------------------------------------------------
ALASKA (3.3%)
Alaska Housing Finance Corp. VRDO
4.15%, 1/8/97 $1,000 1,000
North Slope AK Borough GO
7.50%, 6/30/01 (3) 1,000 1,121
-------------
2,121
-------------
CALIFORNIA (10.6%)
California GO
6.40%, 2/1/06 (1) 500 557
10.00%, 4/1/98 400 430
Clovis CA Unified School Dist.
0.00%, 8/1/05 (3) 2,000 1,310
Los Angeles CA Waste Water System
5.75%, 6/1/10 (1) 400 411
Orange County CA Muni. Water Dist.
COP (Allen McColloch Pipeline)
4.80%, 7/1/03 (1) 1,235 1,253
Sacramento County CA TRAN
4.50%, 9/30/97 1,000 1,008
South Orange County CA Public
Finance Auth.
7.00%, 9/1/06 (1) 875 1,010
Univ. of CA (Multiple Purpose Project)
12.00%, 9/1/03 (2) 500 707
-------------
6,686
-------------
DISTRICT OF COLUMBIA (2.4%)
District of Columbia GO
6.75%, 6/1/05 (2) 1,400 1,494
-------------
FLORIDA (1.4%)
Dade County FL School Dist.
7.375%, 7/1/99 (Prere.) 400 438
Dade County FL Water & Sewer
System Rev. VRDO
4.00%, 1/8/97 (3) 439 439
-------------
877
-------------
ILLINOIS (0.7%)
Illinois Sales Tax Rev.
7.20%, 6/15/99 (Prere.) 400 435
-------------
KENTUCKY (0.7%)
Kentucky Property & Buildings
Comm.
5.80%, 9/1/06 400 422
-------------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
LOUISIANA (1.7%)
Louisiana GO
6.00%, 8/1/01 (3) $1,000 $ 1,062
-------------
MARYLAND (0.6%)
Maryland Dept. of Transp.
5.20%, 9/15/04 400 413
-------------
MASSACHUSETTS (4.7%)
Massachusetts Bay Transp. Auth.
6.25%, 3/1/05 1,000 1,093
Massachusetts GO
7.25%, 7/1/98 (Prere.) 500 531
Massachusetts Ind. Finance Agency
Rev. (Refusetech Inc. Project)
6.30%, 7/1/05 1,000 1,050
Massachusetts Water
Resources Auth.
5.75%, 8/1/10 (1) 300 310
-------------
2,984
-------------
MICHIGAN (6.3%)
Dickinson County MI Memorial Hosp.
System Rev.
7.625%, 11/1/05 500 522
Greater Detroit MI Resource
Recovery Auth.
6.25%, 12/13/06 (2) 1,200 1,313
Michigan Environmental
Protection Program
6.25%, 11/1/08 (Prere.) 1,000 1,102
Michigan Housing Dev. Auth. Rental
Housing Rev.
6.30%, 4/1/04 1,000 1,051
-------------
3,988
-------------
NEVADA (1.2%)
Clark County NV School Dist. GO
6.00%, 6/15/99 (3) 700 730
-------------
NEW JERSEY (2.8%)
New Jersey Econ. Dev. Auth.
Market Transition Fac.
5.70%, 7/1/05 (1) 400 421
New Jersey Health Care Fac.
Finance Auth.
(Atlantic City Medical Center)
6.80%, 7/1/05 1,000 1,086
New Jersey Transp. Trust Fund
6.00%, 6/15/08 250 269
-------------
1,776
-------------
NEW YORK (5.1%)
New York City NY GO
6.375%, 8/15/09 640 668
7.10%, 8/15/07 500 541
New York City NY Muni. Finance
Auth. Water & Sewer System
Rev. VRDO
5.00%, 1/3/97 (3) 575 575
New York Environmental Fac. Corp.
PCR (State Water Revolving Fund)
6.35%, 6/15/06 520 574
New York State Dormitory Auth.
(State Univ.)
5.375%, 5/15/07 (2) 400 416
New York State Thruway Service
Contract Local Highway/Building
5.40%, 4/1/05 (1) 400 416
-------------
3,190
-------------
OHIO (2.8%)
Ohio Public Fac. Comm.
5.50%, 12/1/06 (1) 400 415
Ohio Water Dev. Auth.
5.75%, 12/1/05 (1) 540 573
6.00%, 12/1/08 (2) 750 795
-------------
1,783
-------------
PENNSYLVANIA (3.8%)
Pennsylvania Higher Educ. Fac.
Health Services (Allegheny
Delaware Valley Obligation Group)
5.00%, 11/15/06 (1) 1,125 1,126
Pennsylvania Turnpike Comm. Rev.
7.625%, 12/1/99 (Prere.) 500 555
Sayre PA Health Care Fac. Auth. VRDO
4.00%, 1/8/97 (2) 700 700
-------------
2,381
-------------
TEXAS (4.4%)
Harris County TX Toll Road VRDO
4.05%, 1/8/97 660 660
Houston TX Hotel Occupancy
5.25%, 7/1/07 (4) 500 505
San Antonio TX Water Rev.
6.50%, 5/15/10 (1) 500 545
Univ. of Texas Permanent Fund
6.00%, 7/1/06 1,000 1,089
-------------
2,799
-------------
UTAH (0.4%)
Salt Lake County UT Building Auth.
Lease Rev.
5.90%, 10/1/06 (1) 260 277
-------------
WEST VIRGINIA (1.1%)
West Virginia School Building Auth.
Capital Improvement Rev.
5.625%, 7/1/02 655 691
-------------
- ----------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $33,282) 34,109
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.8%)
(COST $54,541) 64,258
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.8%)
- ----------------------------------------------------------------------------------
Other Assets--Notes B and E 715
Liabilities--Note E (1,845)
-------------
(1,130)
- ----------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO (000)
- ----------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 4,884,555 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $63,128
==================================================================================
NET ASSET VALUE PER SHARE $12.92
==================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
# Non-Income Producing Security.
ADR--American Depository Receipt.
COP--Certificate of Participation.
GO--General Obligation Bond.
PCR--Pollution Control Revenue Bond.
TRAN--Tax Revenue Anticipation Note.
VRDO--Variable Rate Demand Obligation.
(Prere.)--Prerefunded.
Scheduled principal and interest payments are
guaranteed by:
(1) MBIA (Municipal Bond Insurance Association).
(2) AMBAC (AMBAC Indemnity Corporation).
(3) FGIC (Financial Guaranty Insurance Company).
(4) FSA (Financial Security Assurance).
The insurance does not guarantee the market value of the
municipal bonds.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
Paid in Capital $53,608 $10.97
Overdistributed Net
Investment Income (29) (.01)
Accumulated Net Realized
Losses--Note C (168) (.03)
Unrealized Appreciation--Note D 9,717 1.99
- ----------------------------------------------------------------------------------
NET ASSETS $63,128 $12.92
==================================================================================
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (100.2%)
- ----------------------------------------------------------------------------------
General Electric Co. 70,136 $ 6,935
The Coca-Cola Co. 100,826 5,306
Exxon Corp. 53,237 5,217
Intel Corp. 35,592 4,658
# Microsoft Corp. 52,046 4,300
Merck & Co., Inc. 51,679 4,095
Royal Dutch Petroleum Co. ADR 22,429 3,830
Philip Morris Cos., Inc. 33,893 3,817
International Business
Machines Corp. 22,984 3,470
Procter & Gamble Co. 29,234 3,143
AT&T Corp. 67,431 2,933
Johnson & Johnson 53,988 2,686
Pfizer, Inc. 27,490 2,278
Bristol-Myers Squibb Co. 20,844 2,267
E.I. du Pont de Nemours & Co. 24,016 2,266
Wal-Mart Stores, Inc. 97,743 2,236
American International Group, Inc. 20,126 2,179
Hewlett-Packard Co. 42,952 2,158
Mobil Corp. 17,059 2,085
The Walt Disney Co. 29,332 2,042
Citicorp 19,719 2,031
PepsiCo, Inc. 62,952 1,841
Chevron Corp. 28,324 1,841
General Motors Corp. 32,941 1,836
GTE Corp. 38,964 1,773
Federal National Mortgage Assn. 47,532 1,770
Gillette Co. 22,508 1,750
Eli Lilly & Co. 23,798 1,737
# Cisco Systems, Inc. 27,010 1,718
BellSouth Corp. 41,286 1,667
Amoco Corp. 20,694 1,666
Abbott Laboratories 32,697 1,659
Chase Manhattan Corp. 18,096 1,615
The Boeing Co. 14,859 1,581
Ford Motor Co. 49,118 1,566
American Home Products Corp. 26,518 1,555
Motorola, Inc. 24,701 1,516
BankAmerica Corp. 15,057 1,502
Minnesota Mining &
Manufacturing Co. 17,545 1,454
Ameritech Corp. 22,765 1,380
McDonald's Corp. 29,115 1,317
SBC Communications Inc. 24,848 1,286
Lucent Technologies, Inc. 26,525 1,227
NationsBank Corp. 12,520 1,224
Travelers Group Inc. 26,876 1,219
Columbia/HCA Healthcare Corp. 29,086 1,185
Unilever NV ADR 6,746 1,182
Bell Atlantic Corp. 18,188 1,178
# Oracle Corp. 27,753 1,155
American Express Co. 20,188 1,141
Eastman Kodak Co. 14,028 1,126
Kimberly-Clark Corp. 11,772 1,121
Allstate Corp. 18,890 1,093
Texaco Inc. 11,084 1,088
Schlumberger Ltd. 10,433 1,042
Wells Fargo & Co. 3,843 1,037
Chrysler Corp. 30,630 1,011
Home Depot, Inc. 20,029 1,004
Schering-Plough Corp. 15,418 998
Monsanto Co. 24,625 957
MCI Communications Corp. 29,312 956
Emerson Electric Co. 9,566 925
Atlantic Richfield Co. 6,846 907
Time Warner, Inc. 24,091 903
NYNEX Corp. 18,316 881
Warner-Lambert Co. 11,612 871
First Union Corp. 11,739 869
Pharmacia & Upjohn, Inc. 21,570 855
# Compaq Computer Corp. 11,460 851
Campbell Soup Co. 10,556 847
Anheuser-Busch Cos., Inc. 21,014 841
Federal Home Loan
Mortgage Corp. 7,615 839
AlliedSignal Inc. 12,071 809
Banc One Corp. 18,685 803
J.P. Morgan & Co., Inc. 8,060 787
Lockheed Martin Corp. 8,588 786
Dow Chemical Co. 9,940 779
Sara Lee Corp. 20,732 772
Computer Associates
International, Inc. 15,511 772
Sears, Roebuck & Co. 16,599 766
Sprint Corp. 18,472 737
Xerox Corp. 13,465 709
Medtronic, Inc. 10,384 706
First Chicago NBD Corp. 13,134 706
First Data Corp. 19,238 702
Nike, Inc. Class B 11,712 700
Norwest Corp. 15,887 691
United Technologies Corp. 10,466 691
Northern Telecom Ltd. 11,057 684
WMX Technologies Inc. 20,950 683
Pacific Telesis Group 18,538 681
U S WEST Communications Group 20,646 666
Southern Co. 29,112 659
Caterpillar, Inc. 8,395 632
The Seagram Co. Ltd. 16,172 627
Union Pacific Corp. 10,000 601
# Amgen, Inc. 10,988 597
Colgate-Palmolive Co. 6,303 581
Rockwell International Corp. 9,453 575
Fleet Financial Group, Inc. 11,378 567
General Re Corp. 3,587 566
Merrill Lynch & Co., Inc. 6,896 562
Kellogg Co. 8,468 556
Burlington Northern Santa Fe Corp. 6,409 554
McDonnell Douglas Corp. 8,604 551
The Bank of New York Co., Inc. 16,000 540
H.J. Heinz Co. 15,088 539
PNC Bank Corp. 14,001 527
# 3 Com Corp. 7,100 520
Automatic Data Processing, Inc. 11,868 509
# AirTouch Communications, Inc. 20,000 505
Westinghouse Electric Corp. 25,406 505
International Paper Co. 12,323 498
# Viacom International Inc. Class B 14,224 496
Aetna Inc. 6,159 493
Archer-Daniels-Midland Co. 22,224 489
Texas Instruments, Inc. 7,626 486
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
ConAgra, Inc. 9,746 $ 485
# U S WEST Media Group 25,946 480
May Department Stores Co. 10,247 479
Phillips Petroleum Co. 10,792 478
CoreStates Financial Corp. 9,031 468
KeyCorp 9,224 466
J.C. Penney Co., Inc. 9,506 463
Raytheon Co. 9,622 463
CPC International, Inc. 5,911 458
Baxter International, Inc. 11,144 457
SunTrust Banks, Inc. 9,136 450
Aluminum Co. of America 7,004 447
Enron Corp. 10,350 446
Norfolk Southern Corp. 5,073 444
Loews Corp. 4,700 443
Dean Witter Discover & Co. 6,682 443
# WorldCom, Inc. 16,900 439
Corning, Inc. 9,413 435
# Boston Scientific Corp. 7,241 434
Deere & Co. 10,579 430
PPG Industries, Inc. 7,625 428
Gannett Co., Inc. 5,702 427
Barrick Gold Corp. 14,579 419
CIGNA Corp. 3,046 416
Unocal Corp. 10,223 415
Boatmen's Bancshares, Inc. 6,448 415
National City Corp. 9,100 408
General Mills, Inc. 6,441 408
Illinois Tool Works, Inc. 5,086 406
Bank of Boston Corp. 6,260 402
Walgreen Co. 10,040 402
# CUC International, Inc. 16,900 401
# Applied Materials, Inc. 11,100 398
# Dell Computer 7,400 393
# Seagate Technology 9,800 387
# Sun Microsystems, Inc. 15,048 386
Duke Power Co. 8,299 384
Weyerhaeuser Co. 8,101 384
Wachovia Corp. 6,785 383
Mellon Bank Corp. 5,389 383
The Chubb Corp. 7,098 382
MBNA Corp. 9,110 378
CSX Corp. 8,814 372
Household International, Inc. 4,022 371
Albertson's, Inc. 10,365 369
Texas Utilities Co. 8,971 366
First Bank System, Inc. 5,300 362
Pacific Gas & Electric Co. 16,958 356
# Tele-Communications, Inc. Class A 27,329 355
The Gap, Inc. 11,792 355
Edison International 17,828 354
Morgan Stanley Group, Inc. 6,200 354
American Brands, Inc. 7,088 352
AMP, Inc. 9,140 351
Dayton-Hudson Corp. 8,932 351
FPL Group, Inc. 7,549 347
American General Corp. 8,431 345
CVS Corp. 8,259 342
Tyco International Ltd. 6,416 339
# Toys R Us, Inc. 11,291 339
Honeywell, Inc. 5,146 338
United Healthcare Corp. 7,464 336
Pitney Bowes, Inc. 6,140 335
ITT Hartford Group, Inc. 4,901 331
The Goodyear Tire & Rubber Co. 6,416 330
Barnett Banks, Inc. 7,964 328
Ralston-Ralston Purina Group 4,442 326
Conrail, Inc. 3,265 325
# AMR Corp. 3,659 322
American Electric Power Co., Inc. 7,830 322
Textron, Inc. 3,402 321
# EMC Corp. 9,600 318
Air Products & Chemicals, Inc. 4,590 317
Alcan Aluminium Ltd. 9,365 315
Tenneco, Inc. 6,977 315
Occidental Petroleum Corp. 13,445 314
Avon Products, Inc. 5,492 314
Halliburton Co. 5,190 313
Mattel, Inc. 11,220 311
# HFS Inc. 5,200 311
Marsh & McLennan Cos., Inc. 2,952 307
Union Pacific Resources
Group, Inc. 10,391 304
Praxair, Inc. 6,560 303
Marriott International 5,334 295
# Federated Department Stores 8,600 293
Bankers Trust New York Corp. 3,400 293
Crown Cork & Seal Co., Inc. 5,303 288
Dominion Resources, Inc. 7,474 288
Consolidated Edison Co. of
New York, Inc. 9,800 287
USX-Marathon Group 11,978 286
PanEnergy Corp. 6,309 284
# Tellabs, Inc. 7,500 282
Hershey Foods Corp. 6,398 280
Aon Corp. 4,500 280
Fifth Third Bancorp 4,400 276
Service Corp. International 9,780 274
Georgia-Pacific Corp. 3,800 274
Alco Standard Corp. 5,266 272
Wrigley, (Wm.) Jr. Co. 4,797 270
Hilton Hotels Corp. 10,316 270
Entergy Corp. 9,586 266
U.S. Bancorp 5,834 262
# Computer Sciences Corp. 3,172 261
TRW, Inc. 5,240 259
Burlington Resources, Inc. 5,143 259
Lowe's Cos., Inc. 7,235 257
Micron Technology Inc. 8,700 253
Public Service Enterprise
Group Inc. 9,235 252
PacifiCorp 12,262 251
UST Inc. 7,699 249
ALLTEL Corp. 7,900 248
# The Kroger Co. 5,269 245
Unicom Corp. 8,929 242
Masco Corp. 6,634 239
# MFS Communications Co., Inc. 4,400 239
Pioneer Hi Bred International 3,398 238
Williams Cos., Inc. 6,331 237
Dover Corp. 4,690 236
PECO Energy Corp. 9,256 234
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
# Cognizant Corp. 7,080 $ 234
Carolina Power & Light Co. 6,348 232
American Stores Co. 5,586 228
# Digital Equipment Corp. 6,271 228
Lincoln National Corp. 4,321 227
Amerada Hess Corp. 3,917 227
Dresser Industries, Inc. 7,298 226
Browning-Ferris Industries, Inc. 8,558 225
Central & South West Corp. 8,745 224
Inco Ltd. 6,997 223
Sysco Corp. 6,829 223
Houston Industries, Inc. 9,792 222
CINergy Corp. 6,606 220
Eaton Corp. 3,159 220
Green Tree Financial Corp. 5,700 220
Morton International, Inc. 5,400 220
Comerica, Inc. 4,200 220
The Clorox Co. 2,185 219
Placer Dome, Inc. 10,012 218
Delta Air Lines, Inc. 3,072 218
Transamerica Corp. 2,741 217
The Quaker Oats Co. 5,656 216
# Cabletron Systems, Inc. 6,400 213
# Federal Express Corp. 4,780 213
Salomon, Inc. 4,500 212
Newell Co. 6,638 209
Rohm & Haas Co. 2,531 207
Baker Hughes, Inc. 5,979 206
# ITT Corp. 4,701 204
Becton, Dickinson & Co. 4,696 204
Ingersoll-Rand Co. 4,560 203
Providian Corp. 3,943 203
International Flavors &
Fragrances, Inc. 4,482 202
Sherwin-Williams Co. 3,597 201
Genuine Parts Co. 4,525 201
Consolidated Natural Gas Co. 3,617 200
Fluor Corp. 3,180 200
Winn Dixie Stores, Inc. 6,308 199
Tribune Co. 2,529 199
UNUM Corp. 2,759 199
Rite Aid Corp. 5,001 199
# Tenet Healthcare Corp. 9,066 198
Union Carbide Corp. 4,815 197
Coastal Corp. 3,957 193
Times Mirror Co. Class A 3,834 191
# Kmart Corp. 18,250 189
The Limited, Inc. 10,297 189
St. Paul Cos., Inc. 3,189 187
# Price/Costco Inc. 7,426 187
SAFECO Corp. 4,720 185
Sonat, Inc. 3,597 185
Nucor Corp. 3,597 183
Newmont Mining Corp. 4,091 183
Freeport-McMoRan Copper &
Gold Inc. Class B 6,100 182
W.R. Grace & Co. 3,520 182
# Silicon Graphics, Inc. 7,100 181
R.R. Donnelley & Sons Co. 5,741 180
Northrop Grumman Corp. 2,168 179
Eastman Chemical 3,182 176
DTE Energy Co. 5,402 175
W.W. Grainger, Inc. 2,173 174
Hercules, Inc. 4,017 174
The McGraw-Hill Cos. 3,738 172
MBIA, Inc. 1,700 172
Republic New York Corp. 2,100 171
General Dynamics Corp. 2,416 170
Champion International Corp. 3,917 169
Case Corp. 3,100 169
Cooper Industries, Inc. 3,995 168
Jefferson-Pilot Corp. 2,953 167
MGIC Investment Corp. 2,200 167
Great Western Financial Corp. 5,753 167
Guidant Corp. 2,900 165
# Bay Networks Inc. 7,900 165
Phelps Dodge Corp. 2,441 165
VF Corp. 2,421 163
Baltimore Gas & Electric Co. 6,098 163
Comcast Corp. Class A Special 8,596 153
Reynolds Metals Co. 2,706 153
Union Electric Co. 3,948 152
The Dun & Bradstreet Corp. 6,380 152
Allegheny Teledyne Inc. 6,446 148
GPU Inc. 4,400 148
Willamette Industries, Inc. 2,100 146
New York Times Co. Class A 3,765 143
Kerr-McGee Corp. 1,976 142
Interpublic Group of Cos., Inc. 2,957 140
Golden West Financial Corp. 2,218 140
# Western Atlas Inc. 1,960 139
Torchmark Corp. 2,749 139
Knight-Ridder, Inc. 3,570 137
H.F. Ahmanson & Co. 4,199 136
PP&L Resources Inc. 5,900 136
TJX Cos., Inc. 2,851 135
Laidlaw Inc. Class B 11,700 135
Avery Dennison Corp. 3,784 134
# LSI Logic Corp. 4,950 132
Dillard Department Stores Class A 4,286 132
Raychem Corp. 1,646 132
Beneficial Corp. 2,078 132
# Novell, Inc. 13,930 131
# National Semiconductor Corp. 5,309 129
# Andrew Corp. 2,440 129
Ohio Edison Co. 5,621 128
Harcourt General, Inc. 2,766 128
Johnson Controls, Inc. 1,538 127
Dow Jones & Co., Inc. 3,740 127
# Advanced Micro Devices, Inc. 4,908 126
# Humana, Inc. 6,600 126
Rubbermaid, Inc. 5,547 126
Columbia Gas Systems, Inc. 1,973 126
H & R Block, Inc. 4,300 125
Tupperware Corp. 2,317 124
Whirlpool Corp. 2,653 124
# St. Jude Medical, Inc. 2,882 123
Dana Corp. 3,737 122
Union Camp Corp. 2,538 121
Northern States Power Co. 2,628 121
Brown-Forman Corp. Class B 2,635 121
Hasbro, Inc. 3,100 121
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Armstrong World Industries Inc. 1,727 $ 120
Great Lakes Chemical Corp. 2,543 119
James River Corp. 3,579 119
Sigma Aldrich Corp. 1,900 119
Mallinckrodt Inc. 2,662 117
Nordstrom, Inc. 3,274 116
Southwest Airlines Co. 5,187 115
Reebok International Ltd. 2,691 113
Pall Corp. 4,395 112
The Mead Corp. 1,902 111
ITT Industries, Inc. 4,501 110
Circuit City Stores, Inc. 3,628 109
Temple-Inland Inc. 2,000 108
# FMC Corp. 1,523 107
Parker Hannifin Corp. 2,749 107
# Woolworth Corp. 4,850 106
# General Instrument Corp. 4,900 106
# Apple Computer, Inc. 5,091 106
Westvaco Corp. 3,643 105
Liz Claiborne, Inc. 2,669 103
# Fruit of the Loom, Inc. 2,700 102
Tandy Corp. 2,316 102
Ashland Inc. 2,306 101
Deluxe Corp. 3,082 101
# Ceridian Corp. 2,451 99
Engelhard Corp. 5,190 99
Thomas & Betts Corp. 2,228 99
Harris Corp. 1,436 99
Perkin-Elmer Corp. 1,650 97
Paccar, Inc. 1,430 97
# AutoZone, Inc. 3,500 96
Black & Decker Corp. 3,186 96
Wendy's International, Inc. 4,651 95
# Oryx Energy Co. 3,831 95
Pennzoil Co. 1,678 95
USX-U.S. Steel Group 3,000 94
Pacific Enterprises 3,087 94
Harnischfeger Industries Inc. 1,887 91
United States Surgical Corp. 2,292 90
Allergan, Inc. 2,518 90
Brunswick Corp. 3,726 89
Whitman Corp. 3,860 88
Nalco Chemical Co. 2,435 88
Ecolab, Inc. 2,315 87
Ryder System, Inc. 3,064 86
Frontier Corp. 3,800 86
USF&G Corp. 4,091 85
# DSC Communications Corp. 4,774 85
# ALZA Corp. 3,279 85
The Stanley Works 3,106 84
Owens Corning 1,947 83
Giant Food, Inc. Class A 2,404 83
# Thermo Electron Corp. 2,000 83
# Harrah's Entertainment, Inc. 4,149 82
Louisiana-Pacific Corp. 3,900 82
Cyprus Amax Minerals Co. 3,500 82
General Signal Corp. 1,862 80
Santa Fe Pacific Gold Corp. 5,119 79
American Greetings Corp. Class A 2,747 78
Snap-On Inc. 2,167 77
Bausch & Lomb, Inc. 2,202 77
The BF Goodrich Co. 1,874 76
NorAm Energy Corp. 4,918 76
Mercantile Stores Co., Inc. 1,526 75
SuperValu Inc. 2,646 75
Battle Mountain Gold Co. Class A 10,888 75
Maytag Corp. 3,764 74
Bemis Co., Inc. 1,975 73
Echlin, Inc. 2,301 73
Comcast Corp. Class A 4,100 72
Homestake Mining Co. 5,068 72
Moore Corp. Ltd. 3,540 72
# Rowan Cos., Inc. 3,186 72
Pep Boys (Manny, Moe & Jack) 2,208 68
Polaroid Corp. 1,560 68
Worthington Industries, Inc. 3,702 67
Sun Co., Inc. 2,745 67
National Service Industries, Inc. 1,769 66
Manor Care Inc. 2,413 65
Louisiana Land & Exploration Co. 1,213 65
Biomet, Inc. 4,285 65
Boise Cascade Corp. 2,030 64
Tektronix, Inc. 1,251 64
NICOR, Inc. 1,780 64
Meredith Corp. 1,198 63
Cooper Tire & Rubber Co. 3,185 63
Millipore Corp. 1,494 62
Cummins Engine Co., Inc. 1,341 62
Briggs & Stratton Corp. 1,398 62
C.R. Bard, Inc. 2,177 61
Potlatch Corp. 1,400 60
The Timken Co. 1,305 60
ENSERCH Corp. 2,527 58
# Niagara Mohawk Power Corp. 5,793 57
# Santa Fe Energy Resources, Inc. 4,107 57
Stone Container Corp. 3,808 57
Helmerich & Payne, Inc. 1,084 57
# USAir Group, Inc. 2,402 56
Amdahl Corp. 4,593 56
# Tandem Computers, Inc. 3,989 55
Foster Wheeler Corp. 1,422 53
# King World Productions, Inc. 1,427 53
Autodesk, Inc. 1,860 52
Alberto-Culver Co. Class B 993 48
Darden Restaurants Inc. 5,441 48
Scientific-Atlanta, Inc. 3,078 46
# Beverly Enterprises Inc. 3,583 46
USLIFE Corp. 1,367 45
Russell Corp. 1,520 45
Crane Co. 1,503 44
ASARCO, Inc. 1,742 43
Shared Medical Systems Corp. 876 43
Longs Drug Stores, Inc. 871 43
Great Atlantic & Pacific Tea
Co., Inc. 1,330 42
Centex Corp. 1,108 42
# Bethlehem Steel Corp. 4,631 42
Inland Steel Industries, Inc. 2,041 41
# Unisys Corp. 5,981 40
Fleetwood Enterprises, Inc. 1,456 40
Eastern Enterprises 1,072 38
Peoples Energy Corp. 1,119 38
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Freeport-McMoRan Copper &
Gold Inc. Class A 1,300 $ 37
Trinova Corp. 997 36
EG & G, Inc. 1,790 36
Safety-Kleen Corp. 2,197 36
Echo Bay Mines Ltd. 5,082 34
John H. Harland Co. 1,004 33
Jostens Inc. 1,555 33
Springs Industries Inc. Class A 760 33
McDermott International, Inc. 1,941 32
ONEOK, Inc. 991 30
Cincinnati Milacron, Inc. 1,315 29
Alexander & Alexander
Services, Inc. 1,649 29
# Intergraph Corp. 2,751 28
Duracell International, Inc. 400 28
Pulte Corp. 894 27
# Consolidated Freightways, Inc. 1,222 27
# Navistar International Corp. 2,756 25
# Data General Corp. 1,721 25
# TCI Satellite Entertainment, Inc.
Class A 2,463 24
Adolph Coors Co. Class B 1,228 23
Stride Rite Corp. 2,071 21
# Newport News Shipbuilding Inc. 1,255 19
Giddings & Lewis, Inc. 1,414 18
Kaufman & Broad Home Corp. 1,411 18
# Charming Shoppes, Inc. 3,543 18
# Armco, Inc. 3,555 15
Fleming Cos., Inc. 763 13
Ball Corp. 501 13
Caliber System Inc. 615 12
Consolidated Freightways Corp. 911 8
# Ryan's Family Steak Houses, Inc. 1,028 7
# Cox Communications Class A 304 7
NACCO Industries, Inc. Class A 131 7
# Viacom International Inc. Class A 100 3
# Zenith Electronics Corp. 202 2
# Shoney's Inc. 140 1
- ----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $185,159) 235,115
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (0.7%)
- ----------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.39%, 1/2/97
(Cost $1,588) $1,588 1,588
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.9%)
(COST $186,747) 236,703
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.9%)
- ----------------------------------------------------------------------------------
<S> <C>
Other Assets--Note B $ 2,687
Liabilities (4,871)
-------------
(2,184)
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 14,763,343 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $234,519
==================================================================================
NET ASSET VALUE PER SHARE $15.89
==================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $186,145 $12.61
Overdistributed Net
Investment Income (125) (.01)
Accumulated Net Realized
Losses--Note C (1,457) (.10)
Unrealized Appreciation--Note D 49,956 3.39
- ----------------------------------------------------------------------------------
NET ASSETS $234,519 $15.89
==================================================================================
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
CAPITAL APPRECIATION VALUE*
PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.9%)
- ----------------------------------------------------------------------------------
BASIC MATERIALS (5.0%)
# Airgas, Inc. 24,700 $ 544
Albemarle Corp. 28,700 520
Allegheny Teledyne Inc. 27,142 624
# Alumax, Inc. 18,700 624
Aluminum Co. of America 21,600 1,377
ASARCO, Inc. 7,200 179
# Bethlehem Steel Corp. 60,000 540
Champion International Corp. 17,800 770
E.I. du Pont de Nemours & Co. 50,800 4,794
# FMC Corp. 9,400 659
Freeport-McMoRan Copper &
Gold Inc. Class A 138 4
Freeport-McMoRan Copper &
Gold Inc. Class B 11,087 331
Freeport-McMoRan, Inc. 8,166 262
Georgia Gulf Corp. 8,300 223
W.R. Grace & Co. 16,900 875
Great Lakes Chemical Corp. 6,500 304
Homestake Mining Co. 42,500 606
IMC Global Inc. 17,100 669
Inland Steel Industries, Inc. 13,100 262
International Paper Co. 35,600 1,437
# International Specialty
Products, Inc. 50,300 616
Kimberly-Clark Corp. 28,848 2,748
LTV Corp. 48,400 575
Louisiana-Pacific Corp. 1,050 22
Mallinckrodt Inc. 16,500 728
Morton International, Inc. 23,600 962
Newmont Gold Co. 6,000 263
Newmont Mining Corp. 8,000 358
Nucor Corp. 7,900 403
Praxair, Inc. 22,900 1,056
Reynolds Metals Co. 5,300 299
St. Joe Corp. 8,200 533
Santa Fe Pacific Gold Corp. 51,840 797
Sigma Aldrich Corp. 12,100 756
Stone Container Corp. 12,400 184
Wausau Paper Mills Co. 1,100 20
--------------
25,924
--------------
CAPITAL GOODS & CONSTRUCTION (9.3%)
AGCO Corp. 23,800 681
The Boeing Co. 33,600 3,574
Caterpillar, Inc. 22,000 1,656
Centex Corp. 14,900 561
Clayton Homes Inc. 40,116 542
Cummins Engine Co., Inc. 9,800 451
Danaher Corp. 13,800 644
Duracell International, Inc. 17,100 1,195
Emerson Electric Co. 23,600 2,283
Fluor Corp. 14,200 891
# Fore Systems, Inc. 16,400 540
General Electric Co. 141,100 13,951
# General Instrument Corp. 33,500 724
W.W. Grainger, Inc. 9,800 786
Illinois Tool Works, Inc. 14,400 1,150
Lockheed Martin Corp. 19,200 1,757
Martin Marietta Materials, Inc. 20,900 486
McDonnell Douglas Corp. 22,000 1,408
# Microchip Technology, Inc. 9,800 499
Millipore Corp. 15,400 637
Nordson Corp. 9,000 576
Owens Corning 16,200 691
Raychem Corp. 10,100 809
Raytheon Co. 29,700 1,429
# Republic Industries, Inc. 27,600 861
Schuller Corp. 50,100 532
# Thermo Electron Corp. 25,400 1,048
# Thermo Instrument Systems, Inc. 15,787 523
Trimas Corp. 7,700 184
Tyco International Ltd. 22,788 1,205
# USA Waste Service 28,500 908
# USG Corp. 19,300 654
WMX Technologies Inc. 56,500 1,843
Westinghouse Electric Corp. 61,200 1,216
Wheelabrator Technologies, Inc. 36,300 590
York International Corp. 13,400 749
--------------
48,234
--------------
CONSUMER CYCLICAL (16.9%)
# AutoZone, Inc. 32,300 888
# BHC Communications, Inc. Class A 5,200 527
Bandag, Inc. 11,850 561
# Barnes & Noble Inc. 15,700 424
# Bed Bath & Beyond, Inc. 23,000 559
A. H. Belo Corp. Class A 11,900 415
# Best Buy Co., Inc. 22,700 241
# Boise Cascade Office
Products Corp. 23,200 487
# Brinker International, Inc. 34,900 558
# Burlington Coat Factory
Warehouse Corp. 5,300 69
# Burlington Industries, Inc. 1,500 17
# CUC International, Inc. 45,750 1,087
# CableVision Systems Corp. Class B 10,600 325
Callaway Golf Co. 18,900 543
# Choice Hotels Corp. Inc. 15,500 273
# Chris-Craft Industries, Inc. 12,656 530
Chrysler Corp. 17,286 570
Circuit City Stores, Inc. 22,100 666
# Circus Circus Enterprises Inc. 22,700 780
# Coleman Inc. 34,100 469
Comcast Corp. Class A Special 66,066 1,177
# CompUSA, Inc. 29,600 611
# Consolidated Stores, Inc. 20,125 647
Cooper Tire & Rubber Co. 27,300 539
# Corporate Express, Inc. 22,700 668
# Cox Communications Class A 29,300 678
Cracker Barrel Old Country
Stores, Inc. 26,800 682
Darden Restaurants Inc. 66,700 584
Dillard Department Stores Class A 23,200 716
The Walt Disney Co. 63,803 4,442
Dollar General Corp. 24,062 770
# Eckerd Corp. 8,876 284
# Electronic Arts Inc. 19,600 587
Fastenal Co. 12,400 565
# Federated Department Stores 30,800 1,051
First Brands Corp. 20,600 585
Ford Motor Co. 20,200 644
# Fruit of the Loom, Inc. 22,100 837
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
The Gap, Inc. 34,900 $ 1,051
# Gartner Group, Inc. Class A 18,100 705
Gaylord Entertainment Class A 25,843 591
General Motors Corp. 51,500 2,871
# General Nutrition Cos., Inc. 34,900 593
# GTech Holdings Corp. 18,900 605
# HFS Inc. 19,800 1,183
# HSN Inc. 21,690 512
Harley-Davidson, Inc. 16,600 780
# Harrah's Entertainment, Inc. 36,400 723
Hasbro, Inc. 17,600 684
Home Depot, Inc. 48,000 2,406
# Host Marriott 46,100 738
# Host Marriott Services 53,520 488
# ITT Corp. 21,500 933
ITT Industries, Inc. 28,700 703
# Infinity Broadcasting Corp. 25,875 870
International Game Technology 32,000 584
# Jones Apparel Group, Inc. 19,200 718
# King World Productions, Inc. 15,200 561
# Kmart Corp. 86,800 901
# K-III Communications Corp. 55,100 592
# Kohls Corp. 17,300 679
La Quinta Inns Inc. 28,500 545
Lancaster Colony Corp. 13,700 627
# Lands' End, Inc. 1,400 37
# Lear Corp. 19,300 659
# Liberty Media Group Class A 32,275 922
The Limited, Inc. 37,337 686
# Lin Television 10,400 438
# Lone Star Steakhouse & Saloon 18,900 507
Lowe's Cos., Inc. 22,100 785
# LucasVarity PLC ADR 15,456 587
# MGM Grand Inc. 14,300 499
Marriott International 17,000 939
# Marvel Entertainment Group 172,300 323
MascoTech Inc. 14,000 229
Mattel, Inc. 39,712 1,102
McDonald's Corp. 68,200 3,086
# Fred Meyer, Inc. 1,400 50
# Micro Warehouse Inc. 11,500 134
# Mirage Resorts, Inc. 38,200 826
Newell Co. 27,300 860
Nike, Inc. Class B 18,800 1,123
# Nine West Group, Inc. 12,700 589
Nordstrom, Inc. 7,100 252
# Office Depot, Inc. 35,900 637
# Officemax Inc. 45,500 484
# Outback Steakhouse 20,000 533
Pep Boys (Manny, Moe & Jack) 17,800 547
# PETsMART, Inc. 27,700 606
# Price/Costco Inc. 37,700 950
# Promus Hotel Corp. 19,750 585
Reebok International Ltd. 17,750 746
# Revco Drug Stores, Inc. 20,600 762
Rubbermaid, Inc. 31,600 719
Russell Corp. 17,250 513
# Scholastic Corp. 5,000 334
E.W. Scripps Co. 12,835 449
# Service Merchandise Co., Inc. 4,800 20
Shaw Industries, Inc. 47,000 552
# Staples, Inc. 38,025 687
Sunbeam Corp. 32,100 827
# TCI Satellite Entertainment, Inc.
Class A 9,090 90
Talbots Inc. 17,000 487
Tandy Corp. 14,500 638
# Tele-Communications, Inc. Class A 90,900 1,187
Time Warner, Inc. 58,875 2,208
# Toys R Us, Inc. 35,700 1,071
# United States Satellite
Broadcasting Co., Inc. Class A 13,400 132
# U S WEST Media Group 68,700 1,271
# Viacom International Inc. Class A 6,844 236
# Viacom International Inc. Class B 33,006 1,151
# Viking Office Products 24,300 649
Wal-Mart Stores, Inc. 136,000 3,111
Walgreen Co. 33,400 1,336
Warnaco Group 22,800 675
# Woolworth Corp. 32,700 715
--------------
87,240
--------------
CONSUMER STAPLES (9.3%)
Albertson's, Inc. 29,200 1,040
Archer-Daniels-Midland Co. 67,883 1,493
# Clear Channel Communications 19,000 686
The Coca-Cola Co. 218,200 11,483
Coca-Cola Enterprises, Inc. 18,300 888
Crown Cork & Seal Co., Inc. 17,500 952
Dole Food Co. 7,200 244
Gillette Co. 43,400 3,374
Great Atlantic & Pacific Tea
Co., Inc. 16,700 532
IBP, Inc. 26,700 647
# Jefferson Smurfit Corp. 38,800 623
Kellogg Co. 6,500 427
# The Kroger Co. 19,100 888
# Owens-Illinois, Inc. 38,400 874
PepsiCo, Inc. 148,000 4,329
Philip Morris Cos., Inc. 53,600 6,037
Procter & Gamble Co. 62,000 6,665
RJR Nabisco Holdings Corp. 4,360 148
# Safeway, Inc. 30,800 1,317
# Sealed Air Corp. 14,800 616
# Southland Corp. 157,900 469
# Starbucks Corp. 22,500 644
Sysco Corp. 28,100 917
Tyson Foods, Inc. 22,900 784
# Vons Cos., Inc. 14,100 844
Wrigley, (Wm.) Jr. Co. 16,300 917
--------------
47,838
--------------
ENERGY (5.8%)
Amerada Hess Corp. 15,100 874
Amoco Corp. 23,500 1,892
Anadarko Petroleum Corp. 12,300 796
Apache Corp. 21,100 746
Burlington Resources, Inc. 20,200 1,018
# CalEnergy Inc. 20,100 676
# Chesapeake Energy Corp. 9,700 540
Coastal Corp. 18,000 880
# Diamond Offshore Drilling, Inc. 9,500 541
Enron Oil & Gas Co. 24,100 609
# ENSCO International, Inc. 21,400 1,038
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
CAPITAL APPRECIATION VALUE*
PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
ENSERCH Corp. 26,400 $ 607
Exxon Corp. 79,000 7,742
# Global Marine, Inc. 40,900 843
Mapco Inc. 19,600 666
Mobil Corp. 26,500 3,240
# Nabors Industries, Inc. 36,000 693
Noble Affiliates, Inc. 15,400 737
# Oryx Energy Co. 33,000 817
Parker & Parsley Petroleum Co. 1,200 44
Pogo Producing Co. 14,400 680
# Rowan Cos., Inc. 32,700 740
# Santa Fe Energy Resources, Inc. 43,000 597
# Seagull Energy Corp. 2,400 53
# Smith International, Inc. 15,800 709
# TransTexas Gas Corp. 17,900 255
Union Pacific Resources
Group, Inc. 22,842 668
Union Texas Petroleum
Holdings, Inc. 28,300 633
# Western Atlas Inc. 10,600 751
--------------
30,085
--------------
FINANCIAL (10.3%)
AFLAC, Inc. 23,650 1,011
Advanta Corp. Class A 12,800 546
Aetna Inc. 18,697 1,496
Aetna Inc. Pfd.
6.25% Series C 1,333 106
Allmerica Property &
Casualty Cos. 21,300 647
AMBAC, Inc. 10,700 710
American International
Group, Inc. 37,050 4,011
BankAmerica Corp. 35,700 3,561
# CNA Financial Corp. 5,700 610
Capital One Financial Corp. 14,800 533
# Castle & Cooke, Inc. 25,700 408
Citicorp 45,200 4,656
Conseco Co., Inc. 13,733 875
Dean Witter Discover & Co. 20,300 1,345
# Dime Bancorp, Inc. 40,600 599
The Equitable Cos. 22,700 559
Equitable of Iowa Co. 13,100 601
Federal Home Loan
Mortgage Corp. 19,700 2,169
Federal National Mortgage Assn. 103,800 3,866
First Empire State Corp. 2,200 634
First USA Inc. 24,400 845
Franklin Resources Corp. 10,900 745
General Re Corp. 9,800 1,546
Golden West Financial Corp. 11,800 745
Green Tree Financial Corp. 22,800 881
Horace Mann Educators Corp. 3,000 121
ITT Hartford Group, Inc. 17,300 1,168
Lehman Brothers Holdings, Inc. 29,100 913
Leucadia National Corp. 21,100 564
MBIA, Inc. 8,700 881
MGIC Investment Corp. 11,500 874
Merrill Lynch & Co., Inc. 20,900 1,703
Morgan Stanley Group, Inc. 16,000 914
The PMI Group Inc. 11,300 626
Paul Revere Corp. 16,300 607
Price Enterprises, Inc. 13,100 225
Progressive Corp. of Ohio 12,200 822
St. Paul Cos., Inc. 2,400 141
Salomon, Inc. 17,800 839
Charles Schwab Corp. 27,600 883
State Street Boston Corp. 14,500 935
SunAmerica Inc. 20,800 923
TIG Holdings, Inc. 19,600 664
TransAtlantic Holdings 7,600 612
Travelers Group Inc. 64,666 2,934
20th Century Industries of CA 10,400 175
UNUM Corp. 13,200 954
Wesco Financial Corp. 2,700 505
Western National Corp. 30,800 593
Zurich Reinsurance Centre
Holdings, Inc. 5,600 175
--------------
53,456
--------------
HEALTH CARE (12.6%)
Abbott Laboratories 70,300 3,568
# ALZA Corp. 25,400 657
American Home Products Corp. 24,400 1,430
# Amgen, Inc. 30,600 1,666
# Apria Healthcare 13,400 251
Beckman Instruments Inc. 13,700 526
Becton, Dickinson & Co. 21,000 911
# Beverly Enterprises Inc. 49,500 631
# Biogen, Inc. 20,400 788
Biomet, Inc. 37,400 568
# Boston Scientific Corp. 17,500 1,050
Cardinal Health, Inc. 16,200 944
# Centocor, Inc. 21,300 763
# Chiron Corp. 38,440 714
Columbia/HCA Healthcare Corp. 68,921 2,809
Dentsply International 11,900 566
# FHP International Corp. 16,800 622
# Forest Laboratories, Inc. 12,600 413
# Foundation Health Co. 21,900 695
# Genzyme Corp. 26,200 571
# Genzyme Corp. Tissue Repair 391 3
Guidant Corp. 16,000 912
# Health Management Associates
Class A 30,075 677
# Health Systems 24,200 599
# Healthcare & Retirement Corp. 21,300 610
# HealthCare Compare Corp. 14,000 595
# Healthsource, Inc. 41,100 539
# HEALTHSOUTH Corp. 26,601 1,027
# Humana, Inc. 38,400 735
# IDEXX Laboratories 18,500 668
# Interneuron Pharmaceutical, Inc. 23,000 599
IVAX Corp. 49,200 504
Johnson & Johnson 119,806 5,960
Manor Care Inc. 18,900 510
# Medaphis Corp. 23,900 267
# Medpartners Inc. 32,856 690
Medtronic, Inc. 27,500 1,870
Merck & Co., Inc. 107,800 8,543
Mylan Laboratories, Inc. 36,950 619
# Nellcor Puritan Bennett, Inc. 28,500 620
# NovaCare, Inc. 10,200 112
# OrNda Healthcorp 21,700 635
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
# Oxford Health Plan 15,700 $ 919
# Pacificare Health Systems Inc.
Class A 3,100 254
# Pacificare Health Systems Inc.
Class B 4,800 409
Pfizer, Inc. 59,500 4,931
# Phycor, Inc. 20,600 582
# Quintiles Transnational Corp. 9,000 593
# Quorum Health Group, Inc. 22,300 661
# St. Jude Medical, Inc. 18,550 791
# R. P. Scherer Corp. 9,500 477
Schering-Plough Corp. 38,100 2,467
Stryker Corp. 23,700 710
# Sybron International Corp. 20,200 667
# Tenet Healthcare Corp. 39,242 858
United Healthcare Corp. 12,600 567
United States Surgical Corp. 17,600 693
# Value Health, Inc. 15,700 306
# Vencor, Inc. 20,485 648
# Watson Pharmaceuticals, Inc. 16,900 759
# Wellpoint Health Networks Inc.
Class A 16,503 567
--------------
65,296
--------------
TECHNOLOGY (22.5%)
# ADC Telecommunications, Inc. 27,800 865
# Adaptec, Inc. 25,600 1,026
Adobe Systems, Inc. 11,900 446
# Advanced Micro Devices, Inc. 42,700 1,100
# Altera Corp. 14,300 1,039
# Amdahl Corp. 54,900 666
# America Online, Inc. 19,600 652
# American Power Conversion Corp. 45,800 1,251
# Amphenol Corp. 25,600 570
# Analog Devices, Inc. 29,050 984
# Andrew Corp. 14,325 760
# Apple Computer, Inc. 30,600 637
# Applied Materials, Inc. 31,700 1,139
# Arrow Electronics, Inc. 14,500 776
# Ascend Communications, Inc. 17,600 1,093
# Associated Group, Inc. 875 26
# Associated Group, Inc. Class B 875 26
# Atmel Corp. 25,100 835
Autodesk, Inc. 10,500 295
Automatic Data Processing, Inc. 34,800 1,492
# BMC Software, Inc. 22,800 948
# Bay Networks Inc. 37,893 791
# Cabletron Systems, Inc. 23,900 795
# Cadence Design Systems, Inc. 21,350 849
# Cascade Communications Corp. 19,900 1,099
# Ceridian Corp. 16,600 672
# Cirrus Logic 30,400 469
# Cisco Systems, Inc. 66,100 4,210
# Compaq Computer Corp. 29,400 2,183
Computer Associates
International, Inc. 31,275 1,556
# Computer Sciences Corp. 12,800 1,051
# Compuware Corp. 18,900 947
# Concord EFS, Inc. 22,600 633
# DSC Communications Corp. 39,200 703
# DST Systems, Inc. 17,800 558
# Dell Computer 33,000 1,755
# Digital Equipment Corp. 28,200 1,026
# EMC Corp. 38,900 1,289
Electronic Data Systems Corp. 35,500 1,535
# Electronics for Imaging, Inc. 9,200 753
First Data Corp. 46,162 1,685
# FIserv, Inc. 17,900 661
# Gateway 2000 Inc. 13,600 728
# Glenayre Technologies, Inc. 20,075 433
HBO and Co. 16,200 962
Hewlett-Packard Co. 62,900 3,161
# Informix Corp. 35,900 734
# Input/Output, Inc. 25,100 464
Intel Corp. 77,100 10,095
International Business
Machines Corp. 48,900 7,384
# Intuit, Inc. 17,600 559
# Iomega Corp. 37,300 648
# KLA Instruments Corp. 27,000 957
# Komag, Inc. 24,200 655
# LSI Logic Corp. 29,900 800
# LAM Research Corp. 15,800 444
# Lexmark International Group, Inc.
Class A 28,800 796
Linear Technology Corp. 19,200 842
Lucent Technologies, Inc. 23,497 1,087
# MFS Communications Co., Inc. 20,500 1,115
# Marquette Medical Systems
Class A 3,500 77
# Maxim Integrated Products, Inc. 20,800 901
# McAfee Associates, Inc. 13,800 605
# Mentor Graphics Corp. 18,800 184
Micron Technology Inc. 26,000 757
# Microsoft Corp. 79,400 6,565
Molex, Inc. 19,156 749
Motorola, Inc. 27,800 1,706
# National Semiconductor Corp. 35,900 875
# Netscape Communications Corp. 12,900 734
# Nextel Communications 42,700 558
# Novell, Inc. 76,100 721
# Oracle Corp. 53,950 2,249
# Paging Network, Inc. 38,600 591
# Pairgain Technologies, Inc. 21,200 645
# Parametric Technology Corp. 20,200 1,039
Paychex, Inc. 13,300 684
# Peoplesoft Inc. 18,200 872
# Premisys Communications, Inc. 12,900 435
# Qualcomm, Inc. 16,700 666
# Quantum Corp. 38,000 1,083
Reynolds & Reynolds Class A 23,500 611
# SCI Systems, Inc. 11,600 519
# Seagate Technology 36,470 1,440
# Shiva Corp. 5,000 174
# Silicon Graphics, Inc. 39,500 1,007
# Solectron Corp. 15,100 806
# Storage Technology Corp. 17,000 810
# Sun Microsystems, Inc. 48,400 1,243
# SunGard Data Systems, Inc. 15,200 606
# Sybase, Inc. 31,600 527
# Synopsys, Inc. 14,300 658
# Tandem Computers, Inc. 52,400 721
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MARKET
CAPITAL APPRECIATION VALUE*
PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
# Tele-Communications
International, Inc. Series A 34,600 $ 465
# Tellabs, Inc. 27,200 1,025
# Teradyne, Inc. 34,700 846
Texas Instruments, Inc. 20,200 1,288
# 3 Com Corp. 22,400 1,642
# 360 Communications Co. 30,545 706
# U.S. Robotics Corp. 15,100 1,088
# United States Cellular 17,600 491
# VLSI Technology, Inc. 700 17
Varian Associates, Inc. 12,700 646
# Vishay Intertechnology, Inc. 26,176 612
# Western Digital Corp. 21,500 1,223
# Xilinx, Inc. 18,100 666
--------------
116,243
--------------
TRANSPORT & SERVICES (2.3%)
# AMR Corp. 13,300 1,172
# American Standard Cos., Inc. 19,900 761
Burlington Northern Santa
Fe Corp. 17,931 1,548
Consolidated Freightways Corp. 11,300 102
# Consolidated Freightways, Inc. 22,600 503
# Continental Airlines, Inc. Class B 21,900 619
Delta Air Lines, Inc. 5,200 369
# Federal Express Corp. 21,600 961
Kansas City Southern
Industries, Inc. 13,100 589
# Northwest Airlines Corp. Class A 18,700 732
Pittston Brink's Group 18,900 510
Pittston Burlington Group 7,650 153
Southwest Airlines Co. 32,300 715
# UAL Corp. 13,700 856
Union Pacific Corp. 24,653 1,482
Werner Enterprises, Inc. 6,000 109
# Wisconsin Central
Transportation Corp. 16,800 666
--------------
11,847
--------------
UTILITIES (3.0%)
# AES Corp. 20,100 935
AT&T Corp. 61,400 2,671
# AirTouch Communications, Inc. 61,200 1,545
BellSouth Corp. 33,700 1,361
Century Telephone
Enterprises, Inc. 17,100 528
CINergy Corp. 5,700 190
Columbia Gas Systems, Inc. 12,700 808
Frontier Corp. 11,400 258
MCI Communications Corp. 74,500 2,435
SBC Communications Inc. 20,860 1,080
Sprint Corp. 47,000 1,874
Telephone & Data Systems, Inc. 15,500 562
# WorldCom, Inc. 53,456 1,393
--------------
15,640
--------------
MISCELLANEOUS (2.9%)
Alco Standard Corp. 19,600 1,012
# Alleghany Corp. 2,744 582
AlliedSignal Inc. 28,000 1,876
Cintas Corp. 11,100 655
Cognizant Corp. 28,800 950
# Coltec Inc. 22,700 428
# Corrections Corp. of America 25,600 784
# Imation Corp. 22,190 624
# Litton Industries, Inc. 13,000 619
Loews Corp. 11,900 1,122
Manpower Inc. 14,200 461
Mark IV Industries, Inc. 25,981 588
McKesson Corp. 12,200 683
Minnesota Mining &
Manufacturing Co. 29,900 2,478
Olsten Corp. 23,100 349
# Robert Half International, Inc. 18,900 650
Stewart Enterprises, Inc. Class A 18,000 612
Total System Services, Inc. 25,400 683
--------------
15,156
--------------
- ----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $393,763) 516,959
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (0.4%)
- ----------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.39%, 1/2/97
(COST $2,070) $2,070 2,070
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(COST $395,833) 519,029
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
- ----------------------------------------------------------------------------------
Other Assets--Notes B and E 9,031
Liabilities--Note E (10,669)
--------------
(1,638)
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 32,430,779 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $517,391
==================================================================================
NET ASSET VALUE PER SHARE $15.95
==================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $404,544 $12.47
Overdistributed Net
Investment Income (93) --
Accumulated Net Realized
Losses--Note C (10,256) (.32)
Unrealized Appreciation--Note D 123,196 3.80
- ----------------------------------------------------------------------------------
NET ASSETS $517,391 $15.95
==================================================================================
</TABLE>
32
<PAGE> 35
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each Portfolio
during the reporting period, and details the operating expenses charged to the
Portfolio. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any
Net Gain (Loss) realized on the sale of investments, and the increase or
decrease in the Unrealized Appreciation (Depreciation) on investments during
the period.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
GROWTH AND CAPITAL
BALANCED INCOME APPRECIATION
PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends $ 305 $ 3,692 $ 4,224
Interest 1,411 45 157
-------------------------------------------------
Total Income 1,716 3,737 4,381
-------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 24 12 21
Management and Administrative 21 220 581
Marketing and Distribution 13 39 99
Taxes (other than income taxes) 10 12 22
Custodian Fees 25 35 36
Auditing Fees 8 8 8
Shareholders' Reports 4 6 18
Annual Meeting and Proxy Costs -# 1 2
Directors' Fees and Expenses -- -- 1
-------------------------------------------------
Total Expenses 105 333 788
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,611 3,404 3,593
- ----------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (125) (1,158) (8,847)
- ----------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENT SECURITIES 4,790 33,212 80,776
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,276 $35,458 $75,522
==========================================================================================================
</TABLE>
33
<PAGE> 36
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. The amounts shown
as Distributions to shareholders from the Portfolio's net income and capital
gains may not match the amounts shown in the Operations section, because
distributions are determined on a tax basis and may be made in a period
different from the one in which the income was earned or the gains were
realized on the financial statements. The Capital Share Transactions section
shows the amount shareholders invested in the Portfolio, either by purchasing
shares or by reinvesting distributions, as well as the amounts redeemed. The
corresponding numbers of Shares Issued and Redeemed are shown at the end of the
Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
BALANCED GROWTH AND INCOME
PORTFOLIO PORTFOLIO
-------------------------------- ----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1996 1995
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,611 $ 878 $ 3,404 $ 1,431
Realized Net Loss (125) (45) (1,158) (301)
Change in Unrealized Appreciation (Depreciation) 4,790 5,151 33,212 17,169
----------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 6,276 5,984 35,458 18,299
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (1,615) (896) (3,500) (1,444)
Realized Capital Gain -- -- -- --
----------------------------------------------------------------------
Total Distributions (1,615) (896) (3,500) (1,444)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 21,055 15,702 104,812 49,820
Issued in Lieu of Cash Distributions 1,399 790 2,711 1,024
Redeemed (2,724) (335) (3,299) (771)
----------------------------------------------------------------------
Net Increase from Capital Share Transactions 19,730 16,157 104,224 50,073
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase 24,391 21,245 136,182 66,928
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 38,737 17,492 98,337 31,409
----------------------------------------------------------------------
End of Year $63,128 $38,737 $234,519 $98,337
================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 1,728 1,443 7,344 4,239
Issued in Lieu of Cash Distributions 112 70 180 84
Redeemed (224) (31) (233) (65)
----------------------------------------------------------------------
Net Increase in Shares Outstanding 1,616 1,482 7,291 4,258
================================================================================================================================
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION
PORTFOLIO
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995
(000) (000)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,593 $ 1,549
Realized Net Loss (8,847) (1,441)
Change in Unrealized Appreciation (Depreciation) 80,776 42,784
-------------------------------------
Net Increase in Net Assets Resulting from Operations 75,522 42,892
-------------------------------------
DISTRIBUTIONS
Net Investment Income (3,520) (1,680)
Realized Capital Gain -- --
-------------------------------------
Total Distributions (3,520) (1,680)
-------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 194,035 143,035
Issued in Lieu of Cash Distributions 2,907 1,361
Redeemed (5,786) (1,025)
-------------------------------------
Net Increase from Capital Share Transactions 191,156 143,371
- -------------------------------------------------------------------------------------------------------
Total Increase 263,158 184,583
- -------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 254,233 69,650
-------------------------------------
End of Year $517,391 $254,233
=======================================================================================================
(1)Shares Issued (Redeemed)
Issued 13,509 12,127
Issued in Lieu of Cash Distributions 180 103
Redeemed (405) (85)
-------------------------------------
Net Increase in Shares Outstanding 13,284 12,145
=======================================================================================================
</TABLE>
35
<PAGE> 38
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; how much it costs
to operate the Portfolio; and the extent to which the Portfolio tends to
distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996. This
rate is calculated by dividing total commissions paid on portfolio securities
by the total number of shares purchased and sold on which commissions were
charged.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO
YEAR ENDED
DECEMBER 31,
-------------------------- JUL. 25* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.85 $ 9.79 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .36 .31 .09
Net Realized and Unrealized Gain (Loss) on Investments 1.07 2.07 (.21)
---------------------------------------------
Total from Investment Operations 1.43 2.38 (.12)
---------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.36) (.32) (.09)
Distributions from Realized Capital Gains -- -- --
---------------------------------------------
Total Distributions (.36) (.32) (.09)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.92 $11.85 $ 9.79
============================================================================================================================
TOTAL RETURN** 12.21% 24.52% -1.40%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $63 $39 $17
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0%
Ratio of Net Investment Income to Average Net Assets 3.04% 3.06% 2.88%+
Portfolio Turnover Rate 5% 5% 0%
Average Commission Rate Paid $.0216 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was July 25, 1994, to September 5, 1994,
during which time all assets were held in money market instruments.
Performance measurement begins September 6, 1994.
**Total returns do not reflect the 2% redemption fee on shares held less than
one year, or the 1% redemption fee on shares held more than one year but
less than five years.
+Annualized.
36
<PAGE> 39
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
YEAR ENDED
DECEMBER 31,
-------------------------- JUL. 25* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.16 $ 9.77 $10.00
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .27 .25 .09
Net Realized and Unrealized Gain (Loss) on Investments 2.74 3.39 (.23)
----------------------------------------------
Total from Investment Operations 3.01 3.64 (.14)
----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.28) (.25) (.09)
Distributions from Realized Capital Gains -- -- --
----------------------------------------------
Total Distributions (.28) (.25) (.09)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.89 $13.16 $ 9.77
=============================================================================================================================
TOTAL RETURN** 23.03% 37.53% -1.70%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $235 $98 $31
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20%+
Ratio of Net Investment Income to Average Net Assets 2.04% 2.37% 2.82%+
Portfolio Turnover Rate 7% 6% 0%
Average Commission Rate Paid $.0199 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was July 25, 1994, to September 5, 1994,
during which time all assets were held in money market instruments.
Performance measurement begins September 6, 1994.
**Total returns do not reflect the 2% redemption fee on shares held less than
one year, or the 1% redemption fee on shares held more than one year but
less than five years.
+Annualized.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
YEAR ENDED
DECEMBER 31,
-------------------------- JUL. 25* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.28 $ 9.95 $10.00
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .12 .08 .04
Net Realized and Unrealized Gain (Loss) on Investments 2.66 3.34 (.05)
----------------------------------------------
Total from Investment Operations 2.78 3.42 (.01)
----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.11) (.09) (.04)
Distributions from Realized Capital Gains -- -- --
----------------------------------------------
Total Distributions (.11) (.09) (.04)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.95 $13.28 $ 9.95
=============================================================================================================================
TOTAL RETURN** 20.92% 34.38% -0.50%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $517 $254 $70
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20%+
Ratio of Net Investment Income to Average Net Assets 0.91% 0.97% 1.26%+
Portfolio Turnover Rate 12% 7% 1%
Average Commission Rate Paid $.0214 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was July 25, 1994, to September 5, 1994,
during which time all assets were held in money market instruments.
Performance measurement begins September 6, 1994.
**Total returns do not reflect the 2% redemption fee on shares held less than
one year, or the 1% redemption fee on shares held more than one year but
less than five years.
+Annualized.
37
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
Vanguard Tax-Managed Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund, and
comprises the Balanced, Growth and Income, and Capital Appreciation Portfolios.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Unlisted securities held by the Growth and
Income Portfolio are valued at the latest quoted bid prices; such securities
held by the Capital Appreciation Portfolio and the equity portion of the
Balanced Portfolio are valued at the mean of the latest quoted bid and asked
prices. Bonds, and temporary cash investments acquired more than 60 days to
maturity, are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and credit ratings), both as furnished by independent pricing
services. Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Growth and Income Portfolio and the Capital
Appreciation Portfolio, along with other members of The Vanguard Group,
transfer uninvested cash balances to a Pooled Cash Account, which is invested
in repurchase agreements secured by U.S. government securities. Securities
pledged as collateral for repurchase agreements are held by a custodian bank
until the agreements mature. Each agreement requires that the market value of
the collateral be sufficient to cover payments of interest and principal;
however, in the event of default or bankruptcy by the other party to the
agreement, retention of the collateral may be subject to legal proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Premiums and original issue
discounts on municipal bonds are amortized and accreted, respectively, to
interest income over the lives of the respective securities.
B. The Vanguard Group provides investment advisory, corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At December 31, 1996, the Fund had contributed capital aggregating
$72,000 to Vanguard (included in Other Assets), representing 0.4% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
C. During the year ended December 31, 1996, purchases and sales of investment
securities other than temporary cash investments were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(000)
---------------------------------
PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------------------
<S> <C> <C>
Balanced $ 22,655 $ 2,731
Growth and Income 117,788 12,067
Capital Appreciation 238,644 47,351
- ------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 41
At December 31, 1996, the Fund had available realized capital losses to offset
future net capital gains through the following fiscal year-ends:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(S) ENDING AMOUNT
PORTFOLIO DECEMBER 31, (000)
----------------------------------------------------------------------------------------
<S> <C> <C>
Balanced 2003-2004 $ 170
Growth and Income 2003-2005 1,459
Capital Appreciation 2003-2004 10,289
----------------------------------------------------------------------------------------
</TABLE>
D. At December 31, 1996, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(000)
---------------------------------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced $ 10,114 $ (397) $ 9,717
Growth and Income 51,071 (1,115) 49,956
Capital Appreciation 131,464 (8,268) 123,196
- -------------------------------------------------------------------------------------------------------------
</TABLE>
E. The market value of securities on loan to broker/dealers at December 31,
1996, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(000)
-----------------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
- -----------------------------------------------------------------------------------
<S> <C> <C>
Balanced $ 40 $ 48
Capital Appreciation 5,575 6,111
- -----------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Tax-Managed Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Balanced Portfolio, Growth and Income Portfolio, and Capital Appreciation
Portfolio (comprising Vanguard Tax-Managed Fund, hereafter referred to as the
"Fund") at December 31, 1996, and the results of each of their operations, the
changes in each of their net assets and the financial highlights for each of
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian and, with respect to unsettled securities transactions, the
application of alternative auditing procedures, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD TAX-MANAGED FUND
This information for the fiscal year ended December 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Balanced Portfolio designates 82.21% of its income dividends as
exempt-interest dividends.
For corporate shareholders, the following percentage of investment
income (dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction.
<TABLE>
<S> <C>
Balanced Portfolio 100%*
Growth and Income Portfolio 100%
Capital Appreciation Portfolio 100%
</TABLE>
*The percentage applies only to the taxable ordinary income which has been
reported on Form 1099-DIV.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
40
<PAGE> 43
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and
Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in
The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President, Individual Investor Group.
IAN A. MACKINNON, Senior Vice President, Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional.
RALPH K. PACKARD, Senior Vice President and Chief Financial Officer.
[VANGUARD LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 44
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q870-12/96
[PHOTO]
